Another high yield risk factor is oil. Given exposure to smaller, more speculative energy companies, for most of the past year high yield has been trading in line with oil. The correlation has weakened a bit in recent months, but if oil remains below $40 a barrel, investors are likely to refocus on the solvency of smaller energy companies.
Bottom line: While the risks are real, in a world of slow but steady growth high yield still has a place in most portfolios.
Market Realist – TOil shocks and the increasing threat of energy bankruptcies
The correlation between oil and high-yield bond indexes is very high. Where oil goes, high-yield bonds follow. Junk bonds (HYG) (JNK) seem to be in worse shape whenever oil has been exposed. Falling oil prices have made the threat of bankruptcies and consequent defaults look much more likely, forcing high-yield bond investors to keep a close eye on crude oil.
According to Bloomberg data, investors have all but stopped lending to junk-rated energy companies after the crash of oil and have sold a small proportion of high-yield bonds this year.
The performance of high-yield bonds alongside emerging markets and impressive readings on measures of market breadth led Nautilus Investment Research to declare last Friday that “the current uptrend’s health is intact.” Translation: More gains could be ahead for stocks.