3 Fixed Income Areas Of Value

March 22, 2016

Investors looking for value in fixed income relative to a broad benchmark such as the Barclays Aggregate should take a closer look at three pockets of the market—high yield bonds, bank loans and asset-backed investment grade securities—according to Guggenheim.

In its latest quarterly market outlook, Guggenheim’s team of investment managers said that the U.S. economy isn’t going to see a recession this year, or next, and oil prices will stabilize around $40 a barrel by year-end.

More specifically, the team led by Global Chief Investment Officer Scott Minerd, said that oil will remain a key player in market volatility, but downgrades and defaults in energy should be over by the end of the first half of the year. The second half of 2016 should bring stability to oil prices, and that will open up opportunities in the pockets of fixed income such as high yield.

With that macro picture as a backdrop, here are Guggenheim’s picks for relative value:

High-Yield Bonds

High-yield bonds have been largely out of favor as investors braced for a pickup in defaults associated with the slump in oil prices, and its impact on the energy sector. But Guggenheim argues that high-yield bonds offer attractive yields, and the recent beating of the segment was overdone.

“The high yield bond market has been unfairly punished due to commodity weakness and the resulting spillover,” the company said in its latest market outlook. “Yields in many industries are 1.5-2% higher than they were when oil prices began to decline in mid-2014, despite stable fundamentals, and should appeal to clients with higher risk tolerance.”

For ETF investors, the biggest ETFs in this segment are the iShares iBoxx $ High Yield Corporate Bond (HYG | B-68) with $14.6 billion in assets, and average daily trading volume of more than $1.2 billion; and the $11.75 billion SPDR iBoxx $ High Yield Bond (JNK | C-68), trading nearly $500 million on average a day.

Both funds track market-weighted indexes of high-yield corporate debt, and as of March 17, HYG’s 30-day yield sat at 7.15%, while JNK is shelling out 30-day yields of 7.21%.

After tallying losses of more than 5% in 2015, these ETFs seem to have found some sort of a bottom in recent weeks, as the chart below shows:

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