Yielding Nothing

Jonathan Clements  |  November 21, 2015

IT’S BEEN A ROUGH YEAR for yield chasers. But the damage can’t be blamed on a general rise in interest rates, which would have driven down the price of existing bonds. Today, the yield on the benchmark 10-year Treasury note is barely above where it stood at year-end 2014.

Instead, the dreary results stem from concerns about credit quality. Those drawn to the fat yields on Puerto Rican municipals have been rewarded with tumbling bond prices and the threat of default. This year’s biggest losers also include master limited partnerships, a high-yield play on the energy sector, which are down roughly 30% as oil production has fallen off.

Meanwhile, bank loan funds and high-yield junk bond funds are treading water or worse in 2015, as fat yields have been offset by falling share prices. Take the Fidelity High Income Fund. It’s currently boasting a yield of almost 7%. But even with fat dividend payments, the fund is posting a loss for 2015, down 2.7%, thanks to the slide in the fund’s share price.

Will 2016 be kinder? It’s impossible to say, in part because so much depends on how the economy fares. But for now, the margin of safety doesn’t look great.

Again, take high-yield junk bonds. During 2015, the yield above Treasurys has widened from 4.9 to 6.3 percentage points. That means today’s buyer has a bigger cushion, should we see a wave of bond defaults. On the other hand, the average spread historically has been 6 percentage points, so the current buffer isn’t exceptionally large, plus the spread would look a lot tighter if Treasury yields weren’t so low.

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