Tracking The Retail Investor’s Appetite For High Yield Corporate Bonds

Bob Carey
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Tracking The Retail Investor’s Appetite For High Yield Corporate Bonds

Posted Under: Bond Market

View from the Observation Deck

High yield corporate bonds are speculative-grade securities (a much higher level of credit risk) that tend to pay a higher rate of interest than their investment-grade counterparts.
One of the primary indicators used for assessing risk levels in the high yield corporate bond market is the industry default rate. A bond default occurs when the issuer fails to make an interest or principal payment within the specified period.
The long-term global speculative-grade default rate, as tracked by Moody's, has averaged 4.1% since 1983, according to its own release. In April 2019, the default rate stood at 2.1%.
Moody's believes that the default rate will be lower a year from now. It is currently forecasting a default rate of 1.3% at the end of April 2020.
As indicated in the chart, asset levels in high yield corporate bond funds relative to total taxable bond fund assets dropped dramatically during the 2008-2009 financial crisis.
Except for 2013, a year in which bond yields rose markedly, asset levels have remained below the category's average from 2000-2018 (see chart).
In 2013, the yield on the benchmark 10-year Treasury note increased 127 basis points, from 1.76% to 3.03%, according to Bloomberg. We believe yields rose on the belief that U.S. economic growth could accelerate in 2014. It did not come to fruition.
From 2000-2018, total high yield corporate bond issuance as a percentage of total corporate bond issuance averaged 16.7% (not shown in chart), according to data from SIFMA.
From 12/31/99-12/31/18, a period that included many challenges and shocks to the economy, the BofA Merrill Lynch U.S. High Yield Constrained Index posted an average annual total return of 6.69%, according to Bloomberg. For comparative purposes, the S&P 500 Index posted an average annual total return of 4.86% over the same period.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The BofA Merrill Lynch U.S. High Yield Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance.

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Posted on Tuesday, May 21, 2019 @ 1:42 PM • Post Link

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These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

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