Six years into a recovery, stocks at record levels, high-end real estate in
the stratosphere and debt levels soaring in virtually every public and private
sector. Time to scale back and protect those gains, right? Wrong, apparently,
for a depressingly obvious reason: Huge sections of the investing public can't
afford to move into cash or even into conservative paper like short-term Treasuries.
Pension funds that are required to generate 8% annual returns, insurance companies
that only make money if incoming premiums earn at leas 6%, retirees who need
to generate cash on their savings in order to eat, mutual funds that are judged
on quarterly returns, hedge funds that have underperformed lately and will
see a tidal wave of redemptions if they don't outperform from here on out --
all feel compelled to make even more money this year than last. They therefore
have no choice but to roll the dice for big immediate gains. And guess what
they're choosing:
Junk
bonds take the lead in fixed-income returns
After plunging oil prices sent the U.S. high-yield corporate bond market
into a tailspin late last year, the asset class has come back.
High-yield is the best performer in U.S. fixed-income in the year so far,
after chalking up positive returns in April to outperform investment-grade
and Treasuries.
High-yield debt has returned 3.8% in the year so far, according to the Bank
of America Merrill Lynch Global Index System. That compares with 1.7% for
investment grade and 1.3% for Treasuries.
The asset class has also outperformed the broader stock market, with the
S&P 500 SPX, +0.92% showing total returns of 1.1% in the year so far,
according to FactSet data.
"There's just been a desperate demand for yield because rates are so low," said
Martin Fridson, chief investment officer of wealth management firm Lehmann
Livian Fridson Advisors. "Fears of a rate hike have receded and the expectations
have been pushed back to 2016, and high yield has benefited."
In April, the high-yield sector had a positive total return of 1.2%, while
investment grade had a negative return of 0.5% and Treasuries a negative
return of 0.4%. As of Thursday, high-yield was offering an extra 459 basis
point-spread over Treasuries, according to Bank of America Merrill Lynch.
Not surprisingly, high-yield issuance has continued at a healthy clip. U.S.
issuers have sold $133.8 billion of debt in 176 deals in the year so far,
according to Dealogic. That's up from $126.5 billion in 212 deals in the
same period in 2014.
What's depressing about this is the repetition. Since the late 1980s, panicked
governments have responded to slowdowns by herding their most vulnerable savers
into excessively risky assets and then pulling away the football. And every
time the same groups fall for it. Supposedly risk-averse capital flows to the
least appropriate borrowers, who satisfy the demand by issuing a tidal wave
of crappy paper which blows up in short order.
And then the game begins again. Since this process is so obviously purposeful
and clearly doesn't help the individuals who have their nest eggs and pensions
depleted by the inevitable busts, the only conclusion is that someone else
is getting something out of it. Wonder who that could be?
