Risk/reward in the Credit Market – Anecdote
Low yields in the bond market isn’t news, but...
This morning I came across a HY resources name (high BB) with bonds in a medium dated maturity (3-4 years)…Want to know the yield? 1.7%! Which represents a credit spread of approximately 160bps over the US Treasury.
The absolute yield is very low but it also trades around 280bps wide compared to a lower rated peer (B-/CCC rated) in the same space.
Yields on BBs are likely to have been pushed down by Investment Grade (“IG”) buyers dipping into the next tier down.
The preference from IG buyers is to pick-up a spread vs Treasuries while keeping default risk low. While these objectives are likely to be met, mark to market volatility is likely to be heightened due to the ultra low yields.
Such cheap funding is great for shareholders of these companies, as they are likely to benefit through future capital returns.
Some of the questions which I would put to credit market participants are:
Who is the size buyer of this sort of paper at these yields?
Does this level of yield provide adequate protection against inflation, credit risk, rate risk?
What will this bond yield in an environment where the Fed starts hinting at reducing its support for credit markets?
Wish you all the best in this new year, and hope to do more “sub-stacking” after a relatively quiet few months.
As an asset asset allocator who rarely looks at individual securities like this, it is extremely insightful to understand the dynamics you’re considering.