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 1.59% in December, as the high yield market rallied on the perceived benefits of a fiscal compromise in the U.S.
The high yield market rallied during the month of December to end 2012 very strong. Most of the momentum accumulated over the month’s initial few weeks, with the drawn-out negotiations in Washington impacting markets into year end. This led up to January 1st’s eagerly anticipated resolution of the tax cliff, although a big spending cliff remains to be dealt with over the coming months. Sequester and continuing resolution come into play in March, and the debt ceiling will need to be raised sometime between February and April. With the new Congress, there is no reason to believe that the fiscal negotiations that need to conclude by the end of the first quarter will be any easier to complete than the ones just experienced. In this context, we expect businesses and consumers to remain cautious until these issues are resolved. This cautiousness has been offset, to some degree, by the view that aggressive Fed policy both helps the economy, which could lead to money flowing into high yield, and also keeps interest rates low.
We are bullish on the U.S. Auto sector, and are cautiously optimistic on certain segments of the Gaming sector, as convention business continues to recover in Las Vegas. We are also finding opportunities among diversified operators with exposure to Macau, and in regional tribal gaming operators.
Overall, we remain positive on the underlying credit fundamentals of the high yield market, and technicals (quality of new issuance and inflows) remain strong. 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 has the potential to trade in the 350 to 450 basis point spread range. That being said, the high yield market, particularly the BB-rated segment, is increasingly vulnerable to an increase in Treasury yields or spreads, and we intend to be somewhat cautious in early 2013. Given the positive backdrop, our base-case remains that high yield should perform well relative to other fixed income asset classes going into 2013.
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 the prospectus carefully before investing.
The Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index tracks 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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