With plenty of support from the Federal Reserve, yields on high-yield corporate debt are declining in a big way. However, there’s still an opportunity to be had with the FlexShares High Yield Value-Scored Bond Index Fund (NYSEArca: HYGV).
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
Beverage can maker Ball (NYSE: BLL) “is rated BB+, one tier below investment grade, and just sold $1 billion of 10-year bonds with a coupon of 2.875%. That is the lowest on record for a high-yield bond maturing in more than five years,” reports Alexandra Scaggs for Barron’s.
Visiting in HYGV
Specifically, high-yield bonds, like their names suggest, provide opportunities for enhanced yields. Since 1994, the high yield bond market has exhibited an average spread of 509 basis points above Treasuries. That’s particularly relevant today when U.S. interest rates reside near zero.
“The new record is just one indirect consequence of the Federal Reserve’s late March promise to backstop corporate debt. While the central bank has promised to support some junk-rated borrowers—if they were rated investment grade before the pandemic—Ball doesn’t even qualify for that support, because it was rated junk on March 23. But investment-grade yields have plummeted as the result of Fed support, pulling junk-bond yields down with them,” according to Barron’s.
The current market environment is also more supportive of the bond markets. The Federal Reserve is throwing everything, even the kitchen sink, in the economy. The central bank has enacted near-zero rates and unlimited bond purchases, including investment-grade and speculative-grade corporate debt for the first time, to support credit markets.
HYGV focuses on value by pursuing the higher risk/return potential found by concentrating on a targeted credit beta; utilizes Northern Trust Credit Scoring methodology to eliminate bottom 10% of issuers; performs liquidity assessment based on issuer’s debt outstanding, age and remaining time to maturity with the purpose of eliminating the bottom 5% illiquid securities; and intends to match the duration of a market cap-weighted index (ICE BofAML US High Yield Index), while maintaining sector neutrality.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.