Opportunities in High-Yield Credit

Author: Michael Lewitt, Post Date: June 4, 2012
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In a world of zero interest rates and macroeconomic worries, there are a limited number of investment alternatives that can provide reasonable returns and allow investors to sleep at night.  Stocks appear to be reasonably valued but are currently being held hostage by concerns about Europe and weakening US economic numbers.  Government bonds have rallied to the point where they are paying negative real yields.  What is an investor to do?

Despite well-rehearsed macroeconomic concerns, the US corporate sector remains healthy.  While US corporations are likely to experience some ill effects from a slowing global economy, companies are well-positioned to weather a slowdown.  Since the 2008 financial crisis, US corporations have repaired their balance sheets; they have reduced debt, extended debt maturities, increased working capital, and built up healthy cash balances.  As a result, corporate credit quality in the United States remains robust.

Moody’s Investors Service is currently forecasting that the corporate default rate over the next 12 months will be less than 3%, which is significantly below the historical average of 4.6%.  Due to macroeconomic concerns, however, the high-yield bond and loan markets are trading as though the default rate will be between 5 and 6%.  This disparity creates an opportunity for investors looking for attractive risk-adjusted returns. Many borrowers whose 5-7 year bonds offer yields between 7-10% are highly unlikely to default.  Here is a small sample of some of these bonds:

Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
 

Price

Yield(%)

Spread*

Sprint 6.9% due 5/1/19 (B3/B+)

$86.438

9.63

896