Minerd: Buy High Yield & Bank Loans

Minerd: Buy High Yield & Bank Loans

Guggenheim’s Global CIO says this holiday season calls for some risk-asset shopping.

Reviewed by: Cinthia Murphy
Edited by: Cinthia Murphy

Strong economic fundamentals, prospects for a solid retail season ahead, and even the weather should all offer support to risk-type assets going forward, according to Scott Minerd, Guggenheim’s Global chief investment officer.

‘Tired & Weary Benchmark Investors’

“It has been a tumultuous, difficult year for most benchmarks,” Minerd said in a commentary this week. “As the U.S. prepares for its Thanksgiving holiday, there are reasons for tired and weary benchmark investors to be grateful. We are now in a season where past misfortunes are behind us, and risk assets—particularly high-yield bonds and bank loans—are well-positioned to enjoy a prosperous road ahead.”

Here’s what he sees as positive economic developments:

  • There are more positive economic signals than negative. Among them, an uptick in the consumer price index in October, which “has begun to accelerate in year-over-year terms due to positive base effects.”
  • Consumer sentiment improved in October and November, even if retail sales were disappointing then. “The outlook for consumer spending is bright. Historically, weak retail sales combined with strong job and wage growth results in a substantial pickup in economic growth in the ensuing six months.”
  • El Nino is good news for the economy. “As the massive El Nino weather pattern gains strength, it should actually become a boon to the U.S. economy, potentially adding 1.5% to gross domestic product in the first quarter.” In a paper on the topic, the International Monetary Fund said El Nino can impact everything from commodity prices to transportation to energy demand to inflation.
  • The holiday shopping season is upon us. Traditionally, “higher equity prices tend to correlate with strong holiday retail sales, and the recent 10%+ rally in U.S. equity prices bodes well for fourth-quarter consumption.” During the holiday season, about 20% of all retail sales take place.
  • Credit markets have already priced in “a lot of bad news.” Even if the Fed raises rates in December—which the market expects will happen—this is “an opportune time to increase allocations to bank loans and high-yield bonds.”

His outlook comes at a time when high-yield bond ETFs and bank loan ETFs have had a difficult time finding a footing, and investors have had mixed feelings about taking on risk through these types of strategies all year.

Consider that the two largest junk bond ETFs—the $15.2 billion iShares iBoxx $ High Yield Corporate Bond ETF (HYG | B-68) and the $10.3 billion SPDR Barclays High Yield Bond (JNK | B-68)—recently tested lows not seen since late 2011 at the height of eurozone-centered concerns, and remain down on the year, as the chart below shows:

And throughout the year, HYG and JNK have topped both creations and redemptions in any given week. Overall, investors have been net buyers of both HYG and JNK year-to-date, pouring a net of $1.9 billion and $1.5 billion in the funds, respectively, and demand picked up recently following the price decline.

Bank loan ETFs have also been under pressure. Because of their attractive yields, bank loans tend to be favored by investors, who also prefer them because they are higher in the corporate debt structure, and they are floating-rate securities.

Their coupons adjust with changes in interest rates—something that offers income without much duration risk at a time when everyone is concerned about duration exposure in a rising-rate environment. But they still carry credit risk—and higher rates could make it harder for some issuers to service their debt.

In 2015, the most popular fund in this segment—the PowerShares Senior Loan ETF (BKLN | C), with $4.5 billion in assets—dropped some 2.2% as investors yanked nearly $900 million from the fund.

Charts courtesy of StockCharts.com

To Minerd, this is the “opportune” time to take another look at these strategies.

“Even with the Fed’s first rate hike in seven years imminent, the tail winds of positive economic data, accommodative global central banks, and positive seasonal forces are bolstering market resilience and reaffirming a positive environment backdrop for risk assets,” Minerd said. “I believe this environment will continue through holidays and into the first quarter.”

Contact Cinthia Murphy at [email protected].

Cinthia Murphy is head of digital experience, advocating for the user in all that etf.com does. She previously served as managing editor and writer for etf.com, specializing in ETF content and multimedia. Cinthia’s experience includes time at Dow Jones and former BridgeNews, covering commodity futures markets in Chicago and Brazil equities in Sao Paulo. She has a bachelor’s degree in journalism from the University of Missouri-Columbia.