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Q2 2016 MGAM Client Updates
The first 3 months of 2016 appeared to reflect significant changes in the perspective of investors, apparently moving to extreme pessimism and back to realistic optimism. The corrections of 2015 and early 2016 culminated with what could be diagnosed as a temporary freeze in global credit markets, based upon the pricing of US high yield corporate bonds at the February 11th discount of 75% of par value as measured by HYG, the Dow Jones Industrial Average twice approaching 15,500, and the concurrent implosion of domestic oil prices to $27 per barrel.
Springtime appeared to change perspectives: anxiety melted, trees bloomed, and investors bought investments that pay reliable cash flow as evidenced by increases in the Utility Index and US Corporate High Yield Index:
What is a yield panic?
One relevant scenario is 2012. The premise that interest rates could stay lower for longer was put forward, prior to 2012, by Scott Minerd of Guggenheim. During 2012, the values of high cash flow assets paying substantially more that U.S. Treasuries generally rallied in price. It appeared that investors, realizing rates did not have to rise, began to purchase allocations that could provide yield advantages.
Conclusions for 2016-2017
March appears to indicate that the 2012 yield panic scenario could continue to push prices up for high cash flow assets. While discounts to maturity value under control are available, investors should continue to consider that capital flows at the end of the first quarter of 2016 could signal opportunities for the remainder of this year as well as 2017.