Monday, December 14, 2015

Tweeting High Yield: A Round Trip in Investor Sentiment

With high yield all the rage these days, I thought it might be worthwhile aggregating tweets / posts going back to the beginning of this credit cycle to outline where we've come from and to share some thoughts on where we might be going. Curious if this format is helpful or too disjointed.

Backdrop... how did we get from the distressed 2008 (a 20%+ index yield), to sub-10% yields and a risk on mentality?

In March 2009, corporate bonds appeared to be a screaming buy and the Fed had an outsized impact getting spreads (and yields) much lower - much quicker than I thought was possible.

Once things calmed, why was there a reach for yield? Because it was the only place where yields were high.
Why are Investors are Reaching for Yield?: Because high yield is just about the only place you can get yield...
Despite the reach, I didn't mind high yield back in 2012 when rates backed up to 8% given where we seemed to be in the credit cycle (i.e. early).

When did things get frothy? I'd say early 2013 when Yields went sub-5%

Yields went from over 8% to under 5% within 6 months. At that point (and since), I could not get my head around high yield valuations.
Especially when viewed relative to stocks, once the yield on high yield bonds < earnings yield on stocks.
I was far from the only person who saw the froth in high yield
High yield sentiment seemed formed by the strong 5 year performance of the asset class. But perspective on how that return was achieved appeared missing:
Interesting back and forth in comments of this tweet. Some very smart people couldn't see a situation I thought / think has a decent probability. High yield underperformance even without stock underperformance given extreme valuations of high yield.

High Yield Sentiment Flashed Warning Signs in 2014 - Very Briefly

The sentiment shift and my view that high yield investors could be well over their ski's became very apparent when high yield "sold off" just 2% in fall 2014 and investors viewed that as abrupt:
Despite that "sell-off", yields in the lowest quality segment were still absurdly rich, but investors calmed their fears and dove back in, despite crazy yields.

Recent Views: The Sell-off was Expected - It Doesn't Seem to Be the Crisis Others Want to Make It

Which gets us caught up to this year when I brought my blog back after a three year hiatus and I jumped right into an area of the market I felt was misunderstood:
Yet, DESPITE my views of how mispriced things were, until financials within high yield become more stressed, I am less concerned about the recent sell-off's impact on the overall market (though things can / do change quickly):
This is supported by the perspective on where current yields are (yields still aren't all that high) and relatively contained within energy:
In times like this, perspective is much needed (i.e. things haven't been bad by historical standards):
If an allocation to high yield is to be made, note that lower quality high yield has not led to historical outperformance: