Correlation between Treasuries and high yield corporate bonds has been increasing in recent months, but that should not necessarily be cause for alarm, according to Fran Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“Historically, the correlation between high yield bonds and Treasuries has been slightly negative, as high yield debt has generally had a far higher correlation with equities,” said Rodilosso. “However, we are in somewhat uncharted waters at this point. I have never seen interest rates or absolute yields on corporate bonds so low.”
At current levels, high yield bonds are likely to be more sensitive to changes in Treasury yields than they have in the past, according to Rodilosso. “Although I believe there will be greater sensitivity, I do not expect that there will be a one-to-one correlation,” he said. “Despite the all-time low yields in the high yield market, credit spreads are still closer to their historical average than to their lows. That relationship may suggest that high yield still has some cushion against rising Treasury yields, particularly under a slow growth scenario for the U.S. economy.”
Rodilosso also stated that in his opinion, a growing economy leading to moderately higher interest rates should be good for the health of high yield issuers. “Moderately higher rates should not be too much cause for alarm,” added Rodilosso, “but there are some activities that I believe income investors should watch closely such as the amount of leveraged buyout (LBO) or merger and acquisitions (M&A) related-issuance, issues from first time or highly leveraged borrowers, dividend deals, and other signs which were less present in 2011 and 2012 that might indicate there is too much leverage in the market.”
As the Federal Reserve Bank continues to use unprecedented measures to maintain low interest rates, Rodilosso also believes that, at least for the time being, concerns about a near-term interest rate spike are most likely premature. “There still appears to be room for a moderate move higher from present interest rate levels in the near term,” he explained. “But, the risk over the long term is obviously heavily skewed towards an increase in interest rates, and the cost of protecting yourself against such a rise is currently fairly low.“
Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, including 17 years covering emerging markets. Among the Market Vectors ETFs under his watch are Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), LatAm Aggregate Bond ETF (NYSE Arca: BONO), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM), International High Yield Bond ETF (NYSE Arca: IHY), Renminbi Bond ETF (NYSE Arca: CHLC) and Investment Grade Floating Rate ETF (NYSE Arca: FLTR). As of December 31, 2012, the total assets for these ETFs amounted to approximately $1.4 billion.
Van Eck Associates Corporation does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions.
Please note that the information herein represents the opinion of the portfolio manager and these opinions may change at any time and from time to time. This is not a recommendation to buy or sell any security nor is it intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $27.6 billion in assets under management, making it the fifth largest ETP family in the U.S. and eighth largest worldwide as of December 31, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes. Van Eck Global has offices around the world and managed approximately $36.6 billion in investor assets as of December 31, 2012.
There are risks involved with investing in ETFs, including possible loss of money. Shares are not actively managed and are subject to risks similar to those of stocks, including those regarding short selling and margin maintenance requirements. Ordinary brokerage commissions apply. Debt securities carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health. The Funds' underlying securities may be subject to call risk, which may result in the Funds having to reinvest the proceeds at lower interest rates, resulting in a decline in the Funds' income.
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