This asset class with an 8% yield can withstand much more pain, says fund manager

Few assets were safe this year from the blow to financial markets, and junk bonds were also pretty, well, insignificant. Year-to-date, SPDR Bloomberg High Yield Bond ETF JNK,
+0.36%
lost 16% in what will almost certainly be the worst performance since the 2008 financial crisis. Its spread to Treasuries has surpassed 500 basis points for the first time since November 2020.

But what that means is that high yields are now, if not historically high, a sizable 8.4%. Only twice in the past 30 years have yields risen so quickly, according to data from Boston-based value-focused fund manager GMO.

Rachna Ramachandran, a researcher at GMO, points out that the higher yield means the asset class can absorb a lot more bad news. An annual yield of 8.4% can absorb a delinquency rate of 12% in the subsequent 12 months, which is a big jump as the delinquency rate over the previous year was around 1%. “While this is likely to increase in the coming months, hitting a double-digit default rate would quickly require a considerable credit shock,” she says. Last month, S&P projected the default rate at speculative-grade companies could reach 3% by 2023.

This is not to say that yields could not increase further. But, she says, yields would need to rise nearly 100 basis points over the next 6 months, or more than 195 basis points over the next 12 months, before an investment would now go under.

Historically, with these yields, 12-month returns have been attractive. The only time they weren’t was during the global financial crisis. Which is another way of saying that in the absence of a deep recession, high-yield bonds now have a favorable risk/reward profile, she says.

the hum

The quadruple witchcraft – the expiration of index futures and options and single stock options and futures – takes place on Friday.

US listed shares of Alibaba BABA,
+1.17%
rose 10% after Reuters reported that China’s central bank accepted an application by Ant Financial to create a financial holding company.

Not only did the Bank of Japan not raise interest rates on Friday, it reaffirmed its yield-control guidance. The US dollar USDJPY,
+2.23%
rose against the yen, although the central bank said it would closely watch the impact of exchange rate movements on the Japanese economy.

Federal Reserve Chairman Jerome Powell is expected to make welcome remarks at a conference on the international role of the US dollar. Industrial production data and leading indicators should be released.

Adobe ADBE,
-1.61%
Shares tumbled after the software company issued milder-than-expected guidance for the quarter ended in August.

According to the New York Times, SpaceX has fired employees who helped write a letter criticizing the behavior of CEO Elon Musk, who also runs Tesla TSLA,
+1.20%
and is trying to buy Twitter TWTR,
+0.05%.

The European Union recommended that Ukraine be granted candidate status.

The market

After the DJIA industrial Dow,
-0.34%
on Thursday fell below the key level of 30,000, US stock futures ES00,
-0.10%

NQ00,
+0.71%
pointed to a brighter start.

The TMUBMUSD10Y 10-year Treasury yield,
3.214%
fell further to 3.22%. Oil futures CL.1,
-5.20%
rose and bitcoin BTCUSD,
-0.09%
was trading above $20,000.

main quotes

Here were the most active stock market tickers as of 6am in the east.

Highlighter

security name

TSLA,
+1.20%

Tesla

GME,
+3.11%

GameStop

AMC,
+3.69%

AMC Entertainment

NIO,
+4.74%

NIO

AAPL,
+1.14%

Litter

RDBX,
-12.93%

Redbox Entertainment

AMZN,
+1.62%

Amazon.com

TWTR,
+0.05%

twitter

MUNL,
+4.40%

Mullen Automotive

XELA,
+2.25%

Exela Technologies

random readings

Delta Air Lines DAL,
+0.52%
is turning away customers who come to its lounges too soon.

An 18th century cockroach was discovered in a slave trade ledger.

Farmers in Ukraine are tricking Russian troops with poison cherries.

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