Sentiment in the media and in many corners of the marketplace that holds
that high-yield corporate debt is in “bubble” territory may be missing
some key factors currently shaping the bond landscape, according to Fran
Rodilosso, fixed income portfolio manager at Market Vectors ETFs.
“I think there is a difference so far between what we are seeing at the
beginning of 2013 and the type of credit bubbles we have seen
historically,” said Rodilosso. “A bubble is built on excessive leverage,
and modern bubbles have been fueled by leveraged buyouts, real estate
speculation, and structured products with a high degree of embedded
leverage.”
“No doubt some of these phenomena are creeping back into the market, and
leverage at the company level, to generalize, did start rising during
the latter part of 2012,” he added. “But whereas during a more ‘classic’
bubble a vast majority of debt issuance has historically funded
takeovers, dividends, and massive capital spending, 2012’s record
issuance was still, for the most part, done for the purpose of
refinancing. That refinancing was done at lower interest rates, reducing
the cost of debt for many borrowers, while also reducing the amount to
be paid back over the next two years.”
He continued, “Yields have been pushed down by a highly aggressive
central bank policy, with the result that yield-oriented investors have
been pushed into owning lower-rated credits. As a result, the yields on
riskier debt are as low as they have ever been. But the credit spreads,
the difference between the yield on a high yield bond and a Treasury
security, are actually closer to their historic average.”
According to Rodilosso, that fact implies that there still remains some
cushion in high yield bonds against a moderate rise in interest rates, a
cushion he notes we are already seeing in action thus far in 2013. “I
think the point is that bonds are not ‘cheap’ in the sense that there is
considerably less upside than there was a year ago, and credit markets
are vulnerable to a significantly higher move in US interest rates. But,
putting aside the actions of the federal government, the private sector
does not yet appear to me to be at the excessive level of leverage that
would lead to imminent liquidity issues and a spike in default rates, at
least not yet.”
Mr. Rodilosso has 20 years of experience trading and managing risk in
fixed income investment strategies, including 17 years covering emerging
markets. Among the Market Vectors ETFs under his watch are Fallen
Angel High Yield Bond ETF (NYSE Arca: ANGL), LatAm
Aggregate Bond ETF (NYSE Arca: BONO), Emerging
Markets Local Currency Bond ETF (NYSE Arca: EMLC), Emerging
Markets High Yield Bond ETF (NYSE Arca: HYEM), International
High Yield Bond ETF (NYSE Arca: IHY), Renminbi
Bond ETF (NYSE Arca: CHLC) and Investment
Grade Floating Rate ETF (NYSE Arca: FLTR). As of November 30, 2012,
the total assets for these ETFs amounted to approximately $1.4 billion.
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Please note that the information herein represents the opinion of the
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continue. Non-Van Eck Global proprietary information contained herein
has been obtained from sources believed to be reliable, but not
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About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and
span many asset classes, including equities, fixed income (municipal and
international bonds) and currency markets. The Market Vectors family
totals $27.9 billion in assets under management, making it the fifth
largest ETP family in the U.S. and eighth largest worldwide as of
September 30, 2012.
Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955,
Van Eck Global was among the first U.S. money managers helping investors
achieve greater diversification through global investing. Today, the
firm continues this tradition by offering innovative, actively managed
investment choices in hard assets, emerging markets, precious metals
including gold, and other alternative asset classes. Van Eck Global has
offices around the world and manages approximately $37.8 billion in
investor assets as of September 30, 2012.
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