Non-Investment Grade Bond Returns Top 7% For 2013

By Michael Aneiro, Barrons

2013 will be remembered as a pretty terrible year for bonds in general, with the exception of one category:  Non-Investment Grade Bonds. The average return across the high-yield market in 2013 to date just topped 7%, reaching 7.07%, per the latest reading on the Bank of America Merrill Lynch High Yield Master II Index. That puts the market in line for a rare coupon-clipping year, in which the market’s year-end return is pretty close to its average coupon at the start of the year (6.1% in this case), which seems simple enough that it should happen all the time but is actually incredibly rare for Non-Investment Grade Bonds.

Coming off such a seemingly predictable 2013, many investors view "junk" bonds as among the less-risky ways to get yield heading into 2014. The major risk for the high-yield market is default risk, but the current default rate is just 2.4% and that isn’t expected to change much next year. The typically more stable higher-rated bond sectors  (Treasuries, municipals, TIPS) have been notably volatile and lousy in 2013, thanks to their heightened interest-rate risk. But some see more downside than upside in the high-yield market after several straight years of gains, noting that credit risk is going to come back with a vengeance eventually, even if that doesn’t happen in 2014.

The average "junk" bond today trades at 103.4 cents on the dollar and yields 5.61%.

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AdvisorShares Peritus High Yield (HYLD) is a component of the D2 Capital Management Multi-Asset Income Portfolio.  It currently has a 7.70% yield (as of 11 December 2013).

The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

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