Market Vectors’ Fran Rodilosso on the Outlook for Treasurys, High Yield Bonds, and How to Spot Signs of an over-Levered Marketplace
Correlation between Treasuries and high yield corporate bonds has been
increasing in recent months, but that should not necessarily be cause
for alarm, according to Fran
Rodilosso, Fixed Income Portfolio Manager at Market Vectors ETFs.
“Historically, the correlation between high yield bonds and Treasuries
has been slightly negative, as high yield debt has generally had a far
higher correlation with equities,” said Rodilosso. “However, we are in
somewhat uncharted waters at this point. I have never seen interest
rates or absolute yields on corporate bonds so low.”
At current levels, high yield bonds are likely to be more sensitive to
changes in Treasury yields than they have in the past, according to
Rodilosso. “Although I believe there will be greater sensitivity, I do
not expect that there will be a one-to-one correlation,” he
said. “Despite the all-time low yields in the high yield market, credit
spreads are still closer to their historical average than to their lows.
That relationship may suggest that high yield still has some cushion
against rising Treasury yields, particularly under a slow growth
scenario for the U.S. economy.”
Rodilosso also stated that in his opinion, a growing economy leading to
moderately higher interest rates should be good for the health of high
yield issuers. “Moderately higher rates should not be too much cause for
alarm,” added Rodilosso, “but there are some activities that I believe
income investors should watch closely such as the amount of leveraged
buyout (LBO) or merger and acquisitions (M&A) related-issuance, issues
from first time or highly leveraged borrowers, dividend deals, and other
signs which were less present in 2011 and 2012 that might indicate there
is too much leverage in the market.”
As the Federal Reserve Bank continues to use unprecedented measures to
maintain low interest rates, Rodilosso also believes that, at least for
the time being, concerns about a near-term interest rate spike are most
likely premature. “There still appears to be room for a moderate move
higher from present interest rate levels in the near term,” he
explained. “But, the risk over the long term is obviously heavily skewed
towards an increase in interest rates, and the cost of protecting
yourself against such a rise is currently fairly low.“
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 December 31, 2012,
the total assets for these ETFs amounted to approximately $1.4 billion.
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About Market Vectors ETFs
Market Vectors exchange-traded products have been offered since 2006 and
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