For the first time in quite a while, a healthy dose of volatility was introduced into various markets of risk assets, including equities, senior loans and high yield bonds. The volatility was driven largely by geopolitical headlines, including Russia/Ukraine, Gaza, Banco Espirito Santo bailout, Argentine default, etc. As a result, risk sentiment reversed course, and investors became more defensive in the quarter. Moreover, importantly for fixed income investors, with the Federal Reserve's (the "Fed") unprecedented stimulus program approaching the finish line, investor attention began to shift towards 2015 and the timing of the first interest rate increase. The Federal Reserve bond buying program will be reduced to just $15 billion per-month in October, from a peak of $85 billion per month, and is widely expected to conclude at their next meeting at the end of October. On August 28, the 10-year Treasury bond yield reached a one-year low, closing at 2.34%, well below the 3.03% at the start of the year. Rates have indeed been volatile, as evidenced by the fact that by mid-September, the 10-year Treasury yield moved above 2.60%.
We note that much of the credit market volatility in the third quarter, whether senior loan or high-yield bond related, has been technically induced, simply meaning that there have been more sellers than buyers given the sudden shift in risk sentiment. This technical selling pressure, when coupled with low corporate default rates for senior loan and high yield bond issuers and stable/improving corporate profits, suggests that this is merely a healthy dose of volatility which should lead to opportunities for patient investors.
For a discussion of notable events in the senior loan and high-yield market as well as an outlook for the future, click here to read the whole report.