High-yield tailwinds continue to outpace headwinds High-yield tailwinds continue to outpace headwinds http://www.federatedinvestors.com/static/images/fii/fed-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\arrows-chart-small.jpg July 15 2019 March 7 2019

High-yield tailwinds continue to outpace headwinds

At this later stage of the cycle, Federated views this asset class primarily as a good 'clip the coupon' story.
Published March 7 2019
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A more dovish Fed, an end to the government shutdown, the recovery of oil and equities from steep fourth-quarter sell-offs and U.S.-China trade talk optimism have all contributed to this year’s turnaround in the high-yield bond market. Credit spreads—the gap between high-yield and comparable maturity Treasuries—have narrowed from a high of 580 basis points in early January to 433 basis points by the end of February. Federated’s sector committee caught the bulk of that rally, shifting when high yield spreads were at their widest to a 140% overweight allocation to high yield in our core broad fixed-income portfolio model. We pared the recommended overweight to 131% of neutral in early February as the risk-on rally moderated and high yield became more of a “clip the coupon’’ than spread-narrowing story.

Where do we stand now? The committee is maintaining the modest high-yield overweight. The basic economic picture continues to be steady and corporate fundamentals remain strong. However, valuations have been volatile, reinforcing our “buy into weakness, sell into strength” approach. We’re mindful of deteriorating economic conditions in Europe and China, and acknowledge U.S. growth appears to be slowing. This isn’t all that unexpected given the age of this cycle—it’ll hit 10 years in June. All told, we think factors supporting high yield—continued low default rates, low high-yield issuance, favorable credit conditions and reasonable spreads—outweigh concerns at this juncture, buttressing our view that long-term investors should continue to benefit from a healthy allocation to this asset class.

Tags Fixed Income . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risk and may be more volatile than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.

Federated Investment Management Company