{"id":35909,"date":"2014-07-31T01:10:22","date_gmt":"2014-07-30T23:10:22","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/equities-vs-high-yield-the-answer-becomes-clearer\/"},"modified":"2019-12-30T23:01:19","modified_gmt":"2019-12-30T22:01:19","slug":"equities-vs-high-yield-the-answer-becomes-clearer","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/equities-vs-high-yield-the-answer-becomes-clearer\/","title":{"rendered":"Equities vs. high yield ? The answer becomes clearer\u2026"},"content":{"rendered":"

This trend is less noticeable on the graph, yet over the past few weeks of trading,
\nequities and high yield have even moved in opposite directions, since the S&P 500
\ncontinued to climb while America’s Citigroup high yield market index recorded a
\nfew declining sessions.
\n\"sp500-hy-2.jpg\"<\/p>\n

Two explanatory factors can be forwarded. The first is likely to be connected with
\nvaluations. On the one hand, the return on stock dividends offers a consistently
\nmore attractive remuneration than 5-year U.S. government bond rates, as
\nunderscored by the upward trend in this spread.<\/p>\n

\"us_hy_return_-_dividend.jpg\"<\/p>\n

On the other hand, the same spread for private bonds is seen to be continuously
\nnarrowing, albeit in positive territory, which constitutes the very definition of high
\nyield. We’re also observing that the 3% level of spread is often the point where
\nthis value has historically rebounded and would seem to form a floor that’s
\ndifficult to penetrate. Moreover, a rise in bond rates would be proportionately
\napplicable on both spreads, yet its mathematical effect would be negative and
\ncertain, whereas its effect on stocks would remain uncertain.<\/p>\n

The second explanation is likely to be found in companies’ intrinsic value.
\nFrom
\nthis perspective, the implicit high yield default rate stemming from the
\ninstantaneous return of this asset class protects against a rise in the actual
\nrecorded default rates.<\/quote><\/p>\n

These rates are undoubtedly at their minimum levels, though we can still notice
\nthat the discrepancy between implicit and recorded has held, and the market has
\nnot taken advantage of the limited number of U.S. corporate bankruptcies to
\nlower the return on private bonds by more than a proportional amount.<\/p>\n

\"us_hy_default_rate.jpg\"<\/p>\n

Nonetheless, another element is disturbing companies’ fundamentals, with a
\nsignificant increase in debt. As a matter of fact, while the amount of accumulated
\ndebt had leveled off during the 2007-2008 crisis, its growth has taken off at a
\ngood pace since then, especially over the past few years.<\/p>\n

\"us_corporate_debt_in_percent_of_pib.jpg\"<\/p>\n

This re-leveraging of balance sheets may worry the markets at some point when
\nthe issue of raising rates in the U.S. returns to the fore and when the unfavorable
\nspread for U.S. government bonds hits a historically low level as we’ve already
\nwitnessed.<\/p>\n

Obviously, it’s still too early to draw any conclusions on the divergence of these
\ntwo markets, but high yield will need to be closely monitored, given that it
\nremains less liquid than the equity markets.<\/quote>
\n During a correction, investors might
\nfeel trapped and wind up accelerating this decline by running for the exits at any
\nprice.