Looking Through the Noise in High Yield

Looking Through the Noise in High Yield

Looking Through the Noise in High Yield

The volatility currently roiling the U.S. high yield market hasn’t changed our view on credit; but it does reinforce the notion that active management is key for investors who have the flexibility to look for winners and avoid losers in this corner of the bond market. In fact, we see any “distressed selling” as a potential entry point, particularly for those, like us, who have kept some powder dry knowing that today’s low-rate environment has given rise to frequent bouts of volatility.

Here are three points that are top of mind in our own high-yield strategies:

  • Remain patient and add positions selectively, particularly in credits with solid fundamentals that are being unduly pressured by near-term market volatility.
  • Favor domestic U.S. sectors (housing & housing-related sectors, banks/financials, consumer-related industries, healthcare/pharma, etc.) where demand is healthy.
  • Remain cautious on many commodity-related areas.

We believe that the U.S. economic expansion still has legs, even after six years of growth. The consumer, which represents just under 70% of the economy, is healthy and the banking sector has built up a significant capital cushion over the last six years to weather periods of stress. This environment should help keep default rates low, especially for sectors outside of energy and metals and mining.

At PIMCO, we’ve maintained a higher-quality bias in our high-yield portfolios with an emphasis on avoiding lower quality, commodity-related and illiquid securities which have been a challenge for others. This quality bias and rigorous focus on liquidity as part of our active management of portfolios has led us to hold more cash and focus on liquidity positions to capitalize on market dislocations and has driven the firm’s performance.

The ride may be bumpy, but we believe investors with active, long-term managers will be less likely to get derailed.


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High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.