The high yield market, as measured by the Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index, was down 0.62% for the month of August. Political uncertainties continue to weigh on investor sentiment, including a potential military response to Syria and the U.S. approaching the debt ceiling limit in mid-October. Uncertainty about Fed policy and who will be the next Chairman are also in the background.
With Syria weighing on risk appetite, economic data a tad more mixed lately (home sales and durable goods present modest risk to the 2.5% third quarter of 2013 U.S. gross domestic product projection), and investors looking toward several catalysts in September (payrolls, the Federal Reserve meeting, the debt ceiling, and German elections,) 10-year Treasury yields fell for a 4th consecutive session. Notably though, lower Treasury yields have outweighed the softness in equities for high-yield investors, stunting both retail outflows and the rise in high-yield bond yields. Trace volumes are extremely light at this stage with approximately $3.2 billion trading, which compare to a year-to-date average of $5.6 billion per day.
From a sector perspective, an overweight and positive issuer selection in the Support-Services sector was a top contributor to relative performance in August. An overweight and positive issue selection in the Software/Services sector also contributed to relative performance. Finally, we are still positive on the Housing sector. Although concerns about the robustness of the recovery may be warranted, we believe that they are premature. The most recent reported housing data continues to be characterized by lean inventories, strengthening housing demand and home price appreciation. Thus far, homebuilders that have reported earnings have maintained their bullish stance, indicating that macro fundamentals of the housing sector remain on track for recovery. Over the next two years, we see factors such as rising rents, historically high affordability, pent-up demand and job growth outweighing higher mortgage rates as drivers for housing demand.
Our credit posture continues to be underweight BB-rated issuers due to enhanced Treasury sensitivity, and overweight B-rated and CCC-rated issuers due to the improving economy, less Treasury sensitivity, and stronger covenants.
We remain constructive on the high yield market and the U.S. economy. Global volatility and rising interest rates have the possibility of slowing U.S. growth, though we expect the U.S. economy to be resilient. The Housing, Energy, and Automotive sectors could all help support U.S. economic growth. The Federal Reserve is still in a stimulative posture with a clear history of resuming stimulus if it appears necessary (Federal Reserve policymakers continue to stress that the full course of the plan for asset purchases is “data dependent.”) The current state of credit fundamentals, alongside a slowly improving economic backdrop, is consistent with our outlook for a low-default high yield environment.
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 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 www.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. There is a risk of loss.
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