Da Barron's di oggi
Yields on junk bonds have been trading around 4%, leading some observers to suggest renaming the high-yield bond market to reflect these record low yields.
Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors, has been hearing some version of the quip since the market’s yield first fell below 10% in 1993. “To many market veterans…the sub-9% yields of the late 1990s simply did not qualify as high, yet they were more than twice as high as today’s,” he wrote in a Feb. 23 note. “ ‘High’ yield has always really meant a yield ‘higher’ than something else,” such as 10-year Treasuries at 1.4%.
Even so, he wrote, a 4% yield may still look paltry to many investors. But plumbing the depths of the lowest-rated U.S. credits, extending duration risk, or buying complex leveraged vehicles for yield isn’t the answer to juice returns.
Instead, with yields so low across U.S. markets, investors may have to look abroad. Emerging-market bonds and bond funds could provide more options, Fridson wrote.
Simple bond-market math backs up his view. The ICE BofA US High Yield Emerging Markets Corporate Plus Index yields 1.5 percentage points more than the US High Yield Index, he found.
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That premium comes despite the fact that the emerging-market index is actually rated higher than the U.S. index, he wrote. The emerging-market index has a BB3 rating, one notch above the U.S. high-yield corporate bonds’ B1 rating, and both have held those ratings since 2005.
The yield difference isn’t because of currency, either, as the bonds in the index are all U.S.-denominated. The most reasonable explanation for emerging-market bonds’ yield premium is historical volatility. That means investors likely won’t be playing “the financial equivalent of Russian roulette” by investing in the market.
Another trend that could work in favor of emerging-market bonds, and currencies, is the fact that markets aren’t fully reflecting many countries’ responses to Covid-19, wrote Oxford Economics. As a whole—though there is plenty of variation between countries—emerging markets haven’t lagged that far behind more established economies in their relative damage from the coronavirus pandemic, the firm’s economists wrote in a Feb. 23 note.
“It is odd that relative changes in spreads since the start of the pandemic are hardly correlated with long Covid vulnerabilities,” they wrote. “It appears to us as though there is just too much information for markets to process, however, which means there are investable opportunities based on consideration of variation in long-Covid vulnerabilities.”
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Many of the clients of Fridson’s research are high-yield portfolio managers who trade bonds actively, meaning they have time to research individual countries’ responses to Covid-19, as well as foreign companies’ performance.
But individuals can take action on Fridson’s call as well, he said. In a note to Barron’s, he pointed to the VanEck Vectors Emerging Markets High Yield Bond exchange-traded fund (ticker: HYEM) as one way to play that market; it offers a yield of 5.4%, compared with the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) yield of 4.8%.
And there are a few emerging-market bond fund managers with Morningstar four- or five-star ratings and current yields approaching 4%, according to the fund tracker’s data. One is the Eaton Vance Emerging Markets Debt Opportunities Fund (EADOX), which has posted positive performance so far this year, unlike the average emerging-markets debt fund. The TIAA-CREF Emerging Markets Debt Fund (TEDHX) has posted a year-to-date loss but outperformed its fund category, as has the Barings Emerging Markets Debt Total Return Fund (BXEAX).
To be sure, U.S. high-yield bonds still look attractive compared to other U.S. fixed-income markets, Fridson wrote. In fact, he found that lower-rated U.S. corporate bonds actually offer more yield premium over their investment-grade peers than they have historically: As of Feb. 19, junk bonds yielded 2.1 times as much as investment-grade, compared with an average of 1.9 since 1996. Higher-rated bonds with lower coupons are also more exposed to duration risk, or the risk of paper losses when Treasury yields rise the way they are now.
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But for those who find a 4% yield to be too anemic for their needs, there aren’t a great number of alternatives here in the U.S.
Bringing in higher yields “solely by downgrading in quality or extending duration can leave the portfolio dangerously exposed to an economic setback or interest rate spike,” Fridson wrote. “A diversified yield-boosting strategy strikes us as more prudent and increasing [allocations to] emerging markets… is one way of pursuing that approach.”
