The trend has continued this year. According to Ned Davis Research, over the past 52 weeks, dealer positions in high-yield debt have averaged only $5.6 billion per day, down from nearly $7.5 billion per day last year. In addition, investment-grade corporate debt positions are averaging $13.6 billion per day, down from
The Long Arm Of The Fed
Finally, securities held by the Federal Reserve exceed $4.2 trillion.
To put that into perspective, the Fed now owns about a fifth of all Treasury, agency and agency mortgage-backed securities outstanding. Quantitative easing is a tool that has been unleashed to combat an extraordinary event, but it has never been tried before.
Therefore, going back to what the Fed believes is normalized policy may not be as seamless as they want. So there are multiple scenarios here for interest rates.
Stay Tactical To Navigate Risk
We believe all of this points to a manager that can tactically adjust its portfolio to the future changing interest-rate environment. That’s certainly our focus at Clark Capital right now.
Combined, the trend of less primary dealer inventory and more Fed ownership means there’s less liquidity available, particularly during periods of market stress.
That makes it all the more important to effectively manage risk in the bond markets.
We advocate a personalized approach to managing risk in the bond market—one that focuses on an individual investor’s needs as they relate to market conditions. I developed this idea of a personalized approach to risk management in detail in a recent ETF.com article.
ETFs: The Problem Or The Solution?
There’s concern that the adoption rate of fixed-income ETFs could exacerbate volatility during stress points in the market. While we wouldn’t dismiss that concern out of hand, we’re not as fearful, and view ETFs as an additional source of liquidity.
Let’s take high-yield ETFs, such as:
- iShares iBoxx $ High Yield (HYG | B-64)
- SPDR Barclays High Yield (JNK | B-68)
- PowerShares Fundamental High Yield Portfolio (PHB | C-75)
- Pimco 0-5 Year High Yield ETF (HYS | C-82)
- SPDR Barclays Short-Term High Yield (SJNK | B-99)
Sure, these ETFs are very liquid and make it easy for investors and asset managers to express a view about high yield, but we would hardly consider them to be the market and don’t think they are the tail that wags the dog.
High-yield ETFs represent only about 3 percent of the high-yield debt outstanding in the marketplace. In comparison, high-yield mutual funds own more than 25 percent of the high-yield market. The real liquidity risk is not likely to be from ETFs but rather traditional mutual funds as they sell bonds to meet investor redemptions.
At the time of writing, the author's firm owned shares of HYG, JNK and SJNK in client portfolios. Clark Capital Management Group is an independent investment advisory firm providing institutional-quality investment solutions to individual investors, corporations, foundations and retirement plans. Clark Capital was founded in 1986 and has been entrusted with approximately $3 billion in assets. For more information about Clark, contact Advisor Support at 800-766-2264 or [email protected]. Please click here for a complete list of relevant disclosures and definitions.