Kristin Myers: Welcome back to ETF Rundown. It's time now for our ETF Spotlight.
This week we're looking at HYG. That's the iShares iBoxx $ High Yield Corporate Bond ETF.
Now, with the Fed taking center stage this week, we are going to be looking beyond Treasuries and head to another corner of the fixed income market. And I'm talking about high yield corporate debt.
HYG gives investors exposure to lower grade U.S. corporate bonds. And so the debt issued by these companies has a greater credit risk, but also offers investors higher yields.
But right now, there's a bit of a disconnect. Credit spreads remain pretty tight, even though Treasury yields have moved much higher, which makes borrowing much more expensive.
Now, that seems to suggest that investors aren't yet demanding much more compensation for the risk that they are taking.
So HYG is going to be an interesting one to watch on Wednesday, because if the spreads widen as rates remain higher for longer and financial conditions put pressure on more highly leveraged companies, now, if the spread does start to widen, it could mean that higher rates aren't just a bond story, but a corporate stress story.
So let's continue the conversation on fixed income. We're joined now by Matt Freund, Co-CIO and Head of Fixed Income Strategies and a Senior Co-Portfolio Manager at Calamos.
Matt, thank you so much for joining us this morning.
Matt Freund: Oh, it's my pleasure.
Kristin Myers: So the 10 year Treasury right now sitting around 5%. As Bilal and I were just discussing, yields across fixed income really are at levels, as he was mentioning, investors haven't seen consistently in years.
So for ETF investors that are really looking at bonds today, how compelling is the opportunity in your mind?
Matt Freund: Well, I think it's actually very compelling depending on your time horizon.
So what does that mean? It means that there's a lot of volatility from day to day. The previous guest was talking about the Fed, and I think there's a lot of uncertainty with what the new chair is going to do and what the market reactions are going to be.
But if you have a longer horizon, and I don't mean 10 years, but two to three years, you can step into high yield, you can step into loans, and you're getting 7.25%, 7.5% yields with, I think, less volatility, less risk than most investors expect.
Look, high yield is often misunderstood. It has higher income than Treasuries and high quality bonds, but with less interest rate sensitivity.
So it is much less sensitive to Treasuries. And on the downside, it's not as exposed to drawdowns in risk assets as the broad equity markets might be.
Kristin Myers: So it sounds, then, that you're thinking that we're at a point where investors can really get some pretty attractive income without taking, you know, a huge amount of duration and credit risk right now.
Matt Freund: Yeah. So the JPMorgan Loan Index this morning is at three and a quarter, I'm sorry, eight and a quarter, about 380 over. And high yield is a little bit less. It's at 7.80 or so.
Take out expenses, you're talking 7.25%, 7.5%. And I think that that is fairly attractive given the risk characteristics.
There's been a lot talked about with private credit. A lot of the problems in the high yield market have gone loan-only, or they've gone outside the market to private credit.
The high yield market is offering, I think, attractive yields. And right now is very high quality, with a couple of exceptions.
But again, the high yield market, I've been doing this since 1999, and the high yield market is about as high quality as I've seen.
Kristin Myers: So what's the least attractive spot on the curve for you, in your mind? Is it going to be on the longer end of the curve?
Matt Freund: Well, so within high yield, the risks really are centered around the AI buildout.
There's been a lot of issuance, and we're really unsure how well the leases are going to stand up if we were to see a slowdown.
Areas like paper and packaging have been hit pretty hard.
On the curve, now, that's a really interesting question. Thank you for asking it.
I think that your previous guest got it right. The longer end of the curve, you see a lot of people trading there. They're making directional bets, but they don't have a lot of duration.
You can get very attractive yields. So in CANQ, one of the ETFs we manage, we have a duration of four and a quarter, four and a half years. And we're generating a yield on that portfolio of 5.5%, 5.75%.
So we think that's a really nice sweet spot for investors.
They're not going to get hurt too badly if we see the longer part of the curve have rates going up. You have your coupon protection, but at the same time, you're getting an attractive yield to justify holding those positions and keeping it out of the broader equity markets.
Kristin Myers: Yeah. Well, you actually have two funds that allocate across fixed income. You just mentioned CANQ. There's also CCEF.
Obviously, just mentioning a little bit how investors can kind of use some of those funds to navigate the fixed income market.
But I'm curious to know if the move higher in Treasury yields has really changed how those portfolios are allocated, either in terms of duration or in the amount of credit risk.
Matt Freund: So, in terms of duration, we were very short. And as rates have gone up, we actually extended.
We think the risk in the longer, the 10 year part of the curve, let me be really clear, is pretty balanced at 5%.
Over long periods of time, you can see that nominal GDP and interest rates have a relationship. They dance with each other, if you will. One gets ahead of the other, and then the partner catches up.
So in this area, I think being neutral, 10 years and in, is the right thing to do from a duration standpoint.
Most investors don't know what neutral means. That's why I keep trying to phrase it for investors in terms of how much income you're receiving and what your potential downside should be.
So look, five years ago, rates were zero. There was no cushion. There was no ability to withstand higher rates. Rates go up, prices go down.
Today there is. So 10 years and in, we would be neutral.
The longer end of the curve, that's a more speculative play. That's more of a trade. And we would be very hesitant to recommend investors go there unless they really know what they're doing, because the longer duration you have, the more painful your mistakes could be.
Kristin Myers: Yeah, right. Matt Freund, Co-CIO at Calamos. Thank you so much for joining us this morning.
