Marty Fridson, CIO at Lehmann Livian Fridson Advisors LLC – a wealth management fund specializing in income investing, has noticed some peculiar trading action in high-yield bonds in the past week. As risk premiums fell during the weeks of Feb. 11 to March 21, high-yield bonds behaved very predictably, with the lower-rated (higher-risk) bonds outperforming their lower-risk counterparts.
However, after a strong five-week run, bonds sold off during the week of March 21 on fears surrounding the Brussels terrorist attacks and the potential for a Fed rate hike in coming months. The option-adjusted spread (OAS) on the BofA Merrill Lynch High Yield Index had fallen from 8.87 percent on Feb. 11 to only 6.65 percent by March 21, but it spiked back to 6.93 percent by March 24.
During the most recent downturn, bond performance generally correlated with ratings (the lower-rated bonds were hit hardest), but Fridson notes that the CCC-C rated bonds significantly outperformed B and BB rated bonds.
Fridson attributes this strange market action to an overly-pessimistic view on CCC-C rated bonds prior to the downturn.
“The CCC-C category was…
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