Trends Watch: High-Yield Bonds
April 08, 2021
EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.
This week, Elana talks with Adrian Miller, Chief Market Strategist, Concise Capital Management.
What is your outlook for investing in high-yield bonds?
We manage two high-yield strategies, hedged and long-only strategies. When contemplating our hedge fund strategy going forward, which invests in high-yield short-duration bonds, the correlations have been challenging in this environment. In our hedge portfolio, we offset risk by shorting the iShares Russell 2000 ETF (IWM). Yet, in November and December of 2020 when the news of a COVID-19 vaccine came out, the dramatic jump in small-cap stock prices that coincided with a widening in high yield spreads posed performance challenges. The shift in historical correlations linked to significant monetary and fiscal accommodations will continue to be problematic for all types of alternative investments. Consequently, we expect to see continued volatility in the alternatives space across many asset classes.
What are the greatest opportunities you see and why?
During the current rising rate environment tied to strong growth and rising inflation expectations, it's prudent for fixed income portfolios to underweight duration. Consequently, we have constructed our portfolios to average under two years, well inside the high yield market's duration-to-worst 3.8 years. Opportunistic positioning also includes better quality issues, i.e., B-Rated debt, as CCC valuations is stretched. Short duration and better quality positioning should accompany smaller-cap bonds (under $400 million outstanding). These typically underfollowed issues possess superior liquidity premiums and therefore outperformance potential.
What are the greatest challenges you face and why?
The biggest challenge for fixed-income managers is the Federal Reserve: how will the Federal Open Market Committee respond to and adjust for the expected uptick in inflation and robust growth. Presently, measures such as the bond market's ten-year term premium suggest the market expects some form of a taper tantrum. We think the Fed will stay on hold well into 2022 on rate hikes, though we could see a trimming of asset purchases by the end of 2021. That said, while we are constructive on the high yield market, bouts of volatility can be expected going forward.
The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.