Yield opportunities are on the rise

Market Snapshot

Yield opportunities are on the rise

Current market uncertainties are generating potential opportunities for income investors.


Right now, there is over $15 trillion worth of debt with a negative yield. That’s unprecedented.  Bonds do not provide much income, if any.  Stocks do, however, and the dividend yield of the S&P 500 exceeds that of the 10-year Treasury note.

-- Peter Vanderlee, ClearBridge Investments

Since late 2015, the Fed has raised front-end interest rates by a total of 225 bps or 2.25%. This has caused short-term corporate bond yields to rise. At the same time, intermediate and longer-term corporate yields have stayed in almost exactly the same place.

--Kurt Halvorson, Western Asset

As of August 15, 2019, the yield spread between the Alerian MLP Index (AMZ) and 10-Year Treasurys stood at 717 basis points, nearly 90% higher than the 20-year average yield spread of 381 bps. Moreover, the current spread is 2.2 standard deviations above the mean, and this does not happen very often. Including this August, only three times in the last 20 years has the yield spread blown out to more than two standard deviations from the mean.

-- Chris Eades, ClearBridge Investments

Spreads across [both US and European investment-grade (IG) and high-yield (HY) corporate credit] markets have widened lately, but the world of "yield starvation" is back in play. The subsectors offering attractive relative value and showing lower sensitivity to tariffs are financials, energy and basic industries. Our emphasis is also on higher quality issuers such as "rising stars."

-- Michael Buchanan and Robert Abad, Western Asset Management

Sectors such as Information Technology and Materials remain far more exposed to the ongoing trade tensions, with the U.S. making up less than 45% of their geographic revenue and China making up 15% and 8% of their revenue, respectively. In contrast, Utilities and Real Estate have close to 90% of their geographic revenue exposure to the U.S. and less than 1% revenue exposure from China.

-- Research Team, QS Investors


Definitions:

The Alerian MLP Index (AMZ) is a capitalization weighted, float-adjusted index created to provide a complete benchmark for investors to track the energy MLP sector.

A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%)..

A credit spread is the difference in yield between two different types of fixed income securities with similar maturities, where the spread is due to a difference in creditworthiness.

High yield, or below-investment grade bonds are those with a credit quality rating of BB or below.

Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody’s Investors Service and AAA, AA, A and BBB by Standard & Poor’s Ratings Service, or that have an equivalent rating by a nationally recognized statistical rating organization or are determined by the manager to be of equivalent quality.

A Master Limited Partnership (MLP) is a specialized type of corporation that is publicly traded, but structured to have earnings flow directly to participants, without first being taxed at the corporate level. However, a portion of the MLPs distribution may be subject to current income taxes. An investor may owe applicable taxes when the MLP is sold.

Rising stars are bonds that were considered speculation grade when issued but have since improved their financials, reducing the risk of default.

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

A spread is the difference in yield between two different types of fixed income securities with similar maturities.

Standard deviation is a statistic used as a measure of the dispersion or variation in a distribution, or dataset, from its mean, or average; it measures the volatility of an investment’s return over a particular time period; the greater the number, the greater the volatility.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

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Outperformance does not imply positive results.

Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

A Master Limited Partnership (MLP) is a specialized type of corporation that is publicly traded, but structured to have earnings flow directly to participants, without first being taxed at the corporate level. However, a portion of the MLPs distribution may be subject to current income taxes. An investor may owe applicable taxes when the MLP is sold.

Investments in MLP securities are subject to unique risks, including the risks of concentrating investments in a specific sector, changes in government regulation, and changes in tax laws. MLP distributions are not guaranteed and are subject to change based on market or other conditions.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.