The high yield market, as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index, was up 1.03% for the month of March, as the high yield market continued to benefit from stable U.S. economic growth and steady asset reflation driven by the Fed and global central banks.
The high yield market continued to grind tighter during the month despite the negative headlines coming out of Europe. Weak Eurozone growth, the banking crisis in Cyprus, and the failure to form a governing coalition in Italy all failed to damper the positive tone in U.S. markets. This is further evidence that the structural firewalls erected in Europe over the past six months have resulted in a significant de-coupling of U.S. risk markets from European volatility. Unlike the previous three years, market participants are now focusing on stimulative monetary policy, historically low interest rates, steady corporate earnings, and an overall improving U.S. economy driven by the Housing, Auto, and Energy sectors.
The Consumer Confidence Index dropped 8.3 points to 59.7 in March after a 9.6 point increase in February, reflecting mixed consumer sentiment. More specifically, sequestration, tax hikes and increases in gasoline prices may have affected consumer confidence negatively, while recent performance of the high yield market, equity markets and the housing market are likely to offset some of this negativity. Meanwhile, the Fed seems determined to keep rates low as we may enter a soft spot in the economy.
We continue to believe that the Housing sector will have a positive impact on U.S. gross domestic product (GDP) in 2013. The U.S. housing market found a bottom in late 2011, and began to experience a material recovery in 2012, particularly during the second half. There are several reasons why we believe that the U.S. housing industry will continue to improve in 2013 - significant pent-up demand, record home price affordability, the cost to own versus renting near record low levels, historically low interest rates, and low levels of new home starts.
More broadly speaking, positive capital market activity continued to have a positive impact on the composite during the month. Mergers and Acquisitions activity has benefited the Energy and Telecommunications sectors.
Looking forward, we remain constructive on high yield fundamentals, and believe that they are supportive of current market spread and yield levels of 4.86% and 5.71%, respectively. While near-term risks are tied to a potential rise in U.S. Treasury yields and possible contagion from the European periphery, longer-term prospects for the high yield asset class remain strong. The current state of credit fundamentals, alongside a slowly improving economic backdrop, is consistent with our outlook for a low high yield default environment. A modest pace of economic growth, low capital-raising needs, accommodative central banks and monetary policy, and a steady demand recovery in the U.S. are all supportive of profitability for high yield issuers.
High yield bonds are subject to greater price volatility and may be less liquid than higher ratedsecurities; 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 U.S. 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.
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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