The high yield market, as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index, posted a positive total return of 0.74% in November, as high yield investors focused on the fiscal cliff and the risk that the U.S. government fails to negotiate a resolution.
With the U.S. elections decided earlier in the month, high yield market participants narrowed their focus on the fiscal cliff, and what the most likely outcome will be. The uncertainty surrounding the fiscal situation in the U.S. led to elevated levels of volatility in equities, which eventually spilled over into the high yield market. As the month wore on, investors became more comfortable that there would ultimately be some compromise even if it did not occur until after December 31, 2012, and subsequently dipped back into the markets as the global search for yield continues. With a slow growth outlook and continued elevated unemployment in the U.S., the base case remains that U.S. Treasuries will be pinned down for some time. This is driving investors into higher yielding credit products such as high yield bonds. After a brief lull in the middle of November, inflows into the high yield market turned positive late in the month and have gained momentum into December.
The high yield new issue market remained active during the month of November. $30.5 billion of high yield bonds were priced during November, despite a pickup in market volatility towards the middle of the month. Even with quarterly U.S. gross domestic product (GDP) growth averaging less than 2.0% in 2012, new-issue conditions for high yield issuers are the strongest on record. After pricing $457 billion in 2010 and $475 billion in 2011, combined high-yield bond and loan issuance of $580 billion through November 2012 has already surpassed the previous annual record of $536 billion set back in 2007. And importantly, with economic growth conditions remaining tepid throughout 2012, business behavior has remained conservative, maintaining an emphasis on de-leveraging versus re-leveraging, and limiting risky issuance commonplace ahead of previous default cycles.
More generally, Financials performed well along with the recent stabilization in European financial conditions. In the Specialty Chemical sector, issuers continue to benefit from low natural gas prices. Consequently, a large issuer in the sector traded up as Moody’s upgraded the company to investment grade. This “Rising Star” theme has had a positive impact on several sectors in high yield, including Autos, Chemicals, and Telecommunications. Several issuers in the Wireless sector traded up due to positive capital market events and better conditions in U.S. and European markets.
Overall, we will be vigilant given valuations, particularly in the higher-quality segment of the market. We are optimistic regarding the underlying credit fundamentals of the high yield market, and believe technicals (new issuance and inflows) remain very strong. Even though the market appears to have priced in a few dividend deals recently, overall, we feel that new issue deal quality is good. Companies continue to refinance higher-coupon debt, extend maturities, and focus on balance sheet repair. Further, with slow growth, low interest rates, and low default rate expectations, high yield investments have compelling potential trading opportunities. Given the positive backdrop, our belief is that high yield investments appear likely to perform well relative to other fixed-income asset classes.
An investment in the Fund is subject to risk, including the possible loss of principal amount invested. High yield bonds are subject to greater price volatility and may be less liquid than higher rated securities; are subject to greater sensitivity to interest rate and economic changes. As interest rates rise, the value of debt securities decreases; whereas prepayment risk tends to occur during periods of declining interest rates. The decline in an issuer’s credit rating can negatively affect the value. International investing involves certain risks and increased volatility not associated with investing solely in the US. These risks include currency fluctuations, economic or financial instability, and lack of timely or reliable financial information or unfavorable political or legal developments. These risks are magnified in emerging markets. Distressed securities are speculative. Newly organized Funds have no trading history, and there can be no assurance that active trading markets will be developed or maintained. The Fund may not be suitable for all investors and is not intended to be a complete investment program.
Investors should carefully consider the investment objectives, risks, charges and expenses of each Fund before investing. This and other important information is contained in the Nomura Partners Funds, Inc.prospectus, which may be obtained by contacting your financial advisor, by calling Nomura Partners Funds at 1-800-535-2726, or visiting our website at nomurapartnersfunds.com. Please read theprospectuscarefully before investing.
The Bank of America Merrill Lynch U.S. High Yield Master II Constrained Indextracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market. One cannot invest directly in an index.
This material contains the current opinions of the author, which are subject to change without notice. This material has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information used to compile this report has been obtained by sources deemed to be reliable, but its accuracy and completeness are not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Past performance is no guarantee of future results.
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