uploads///Vanguard  Index Fund Investor Class VFINX

What Jeffrey Sherman of DoubleLine Thinks about High Yield Market


Mar. 2 2016, Published 4:20 p.m. ET

US stock indexes rose

The three US equity indexes that we review in this weekly series rose from February 23 to March 1 as the stock market rallied on GDP data suggesting that the US economy is slowing picking up and inflation has started to tick up from low levels. Meanwhile, manufacturing data also showed signs of stability. The S&P 500 Index, tracked by the Vanguard 500 Index Fund Investor Class (VFINX), was up by 2.6%. The Dow Jones Industrial Average (DJIA) rose 2.3% while the NASDAQ rose 3.2%.

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In a noteworthy development, the People’s Bank of China (or PBoC) reduced rates further on February 29, its fifth rate cut since February 2015. The PBoC cut the reserve requirement ratio (or RRR) by 50 basis points in an effort to provide liquidity to the financial system and to boost the economic outlook.

Jeffery Sherman’s opinion

Jeffrey Sherman co-manages the Shiller Enhanced CAPE Fund along with Jeffrey Gundlach. He said, “For broad-based market exposure, I still think that the high-yield market has a little bit more pain in the mid-term.” He was of the opinion that despite a rebound in equity markets, high yield investors may suffer due to volatility in the energy sector.

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Economic indicators

US GDP for the fourth quarter grew at an annual rate of 1.0%, up from 0.7% growth reported earlier. The economy grew at a rate of 2% in the third quarter. Meanwhile, the core PCE (personal consumption expenditures), which excludes food and energy prices, rose 1.7% year-over-year in January, the largest rise since July 2014.

The Institute for Supply Management’s (or ISM) manufacturing index rose to 49.5 in February from 48.2 the month before. US manufacturers have been hurt by a strong dollar and weak global demand.

Earnings results and corporate news

Shares of Dollar Tree (DLTR) rose even though revenues were short of estimates. Shares of Ross Stores (ROST) and United States Cellular (USM) rallied after posting better-than-expected earnings results. The share price of Kate Spade & Company (KATE) dropped as earnings results missed expectations and the company posted a weak outlook. Meanwhile, shares of AMC Entertainment Holdings (AMC) fell after it missed revenue expectations.

Shares of Federal-Mogul (FDML) soared after Carl Icahn’s Icahn Enterprises offered to acquire the remainder of the business.

Junk bonds

Junk bond yields fell 41 basis points week-over-week and ended at 9.1% on February 26, 2016. Due to a decline in yields, returns of mutual funds investing in junk bonds like the American Funds American High-Income Trust–Class A (AHITX) and the T. Rowe Price High Yield Fund–Advisor Class (PAHIX) rose in the week ended February 26.

This series will cover the developments in the primary and secondary markets for high yield debt and leveraged loans. We will begin with developments in the high yield primary market issuance.


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