In Like a Lion, Out Like a Lamb
with Randy Masel, Managing Director (April 2, 2015)
After a rousing 2.4% gain in February, it is not surprising that the high yield market backed off a bit in March. The Bank of America High Yield II Master Index dropped .53% during the month, ending with a yield to worst call of 6.21%. Spreads over Treasuries widened 36 basis points. Much of the widening in spreads is attributable to the sell-off in energy bonds, which gapped 65 basis points wider according to Bank of America.
High yield largely mirrored the broader markets over the course of the month, dropping early on with stocks and bonds and then recovering after the Federal Reserve’s dovish commentary on March 18th. Year to date, high yield is still up a respectable 2.54%, well outpacing the .95% total return of the S&P.
Looking forward, disappointing economic numbers combined with a Federal Reserve that is no longer patient but far from impatient have calmed interest rate fears. It also doesn’t hurt that German government 10-year bonds are yielding .165% as of this writing (and yes, the decimal is in the right spot). Corporate earnings growth is expected to turn negative in the first quarter, but the noise around corporate earnings has been so downbeat that an awful lot of bad news seems to be built in.
Oil prices have stabilized, at least for now, at very depressed levels. I am becoming increasingly skeptical of a significant bounce ($70 WTI) during 2015. OPEC, and particularly the Saudis, seem intent on letting the market run its course, thereby pressuring U.S. shale producers and, perhaps more importantly for the Saudis, Iran. The good news for the high yield market is that the pain in energy bonds has been localized and has not spread in any meaningful way to other parts of the market (similar to what we have seen in the muni market with Puerto Rico). As liquidity has been sucked out of the market, this immunization could wear off if fund flows turn meaningfully negative again. Previous liquidity-induced sell-offs have proven to be good times to pick up some babies that have been thrown out with the bathwater. There are a number of cross-currents in the markets: a strong dollar, weak emerging market economies, geopolitical issues, etc. However, the basic macroeconomic backdrop for high yield (low rates, a slowly growing economy, and robust capitalmarkets) remains benign. At least for now, we will look at any sell-offs opportunistically to add to our positions.
Randy Masel manages a proprietary high yield corporate bond strategy that he created and launched when he joined Granite Springs Asset Management in January 2014. Mr. Masel has more than thirty years of experience in the credit markets, as a banker, credit analyst, and a portfolio manager. He began his career on Wall Street as a corporate bond analyst for Paine Webber, Inc. There, he held several senior level research positions, ultimately becoming Managing Director responsible for the firm’s entire U.S. credit research department. Prior to joining Granite Springs, Mr. Masel was a portfolio manager and credit analyst with JAE Credit. He also formerly held senior level positions with Millennium Partners, LP, Moore Capital Management, and James Caird Asset Management. Mr. Masel holds a BA from Washington University and a MBA from Harvard University. Mr. Masel also holds the FINRA Series 65 license.
Granite Springs Asset Management, LLC is a privately held SEC registered investment advisor that specializes in fixed income portfolio management and tactical asset allocation investment strategies for private clients, family offices, financial advisers, insurance companies, pension plans, and other institutional investors. The investment philosophy at Granite Springs is based on two principal beliefs; that asset allocation is the most important investment decision and; that disciplined risk management leads to superior returns over time.
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