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Wednesday, February 25, 2015

Update on HYLD

Update on HYLD
Hyld will be paying its February dividend on the 27th of $.28 after $.20 in January.  I calculate that as a bit under a 7% yield the twelve month trailing yield is 9.64%.   The price has recovered (currently at around 42) but not nearly enough to recoup the losses from last year’s 12.8% fall calculated based on total return: price change +dividend). The total return is -3%   for the last 2 years and +3.3% year to date. Below is a one year total return (measured as growth of $100,000) over 12 months

The oil price has stabilized for now and it seems the “market consensus “fickle as it is has turned more favorable to high yield bonds.
From Bloomberg 

The message from the junk bond market is that the world’s biggest economy is picking up.
The securities have returned 1.7 percent in February, headed for the biggest monthly gain in a year, Bank of America Merrill Lynch index data show. Treasuries are plunging as investors dump the haven assets they turn to in times of turmoil. U.S. government securities have fallen 2.1 percent this month, the biggest decline since 2009, according to the indexes.
JPMorgan Asset Management is recommending high-yield bonds as an alternative to the slim payments investors get from sovereign debt…..
Companies that were once investment-grade rated and have since plunged into junk territory are offering some of the best returns in U.S. credit markets.
The fallen angel securities have returned about 8 percent in the past 12 months, and 3.2 percent in 2015 alone, the Bank of America data show.
Junk bonds are high-risk, high-yield securities are rated below Baa3 by Moody’s Investors Service and less than BBB- by Standard & Poor’s.
They have an effective yield of 6.13 percent, versus 1.43 percent for Treasuries and 0.17 percent for German bunds, based on the Bank of America data.

  With the “weak hands” including many individual investors having sold their positions through ETFs and funds…the professionals are picking through the beaten down bonds to find the good values. HYLD is actively managed so they should benefit vs. an index. I don’t believe in active management in general but high yield at this point should give room for an active manager to do well.
Savvy professional longer term investors like private equity firms have been buying beaten down assets in the energy area. Blackstone group (BX) just set up a second fund to invest in this area.
My longer term expectation has been that short term high yield with its yield spread over investment grade bonds and treasury bonds and short duration should outperform the bond index over the near future and even perform well compared to relative to a highly values US stock market. Obviously that was not the case last year.
Things look better this year but certainly it is too early to say the worst is over. Oil is still a wild card risk and no one can rule out a further decline in oil prices.
Here are recent total returns
                            YTD    One year
Total US Bond    1.2          5.8
Total US stock    3.3          15.4
Hyld                     3.3         -12.8

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