High Yield Bond & Leveraged Loan Week in Review

Posted on April 3, 2020

March 27 - April 2, 2020

Last week, markets received two “shots in the arm” in the form of unprecedented fiscal and monetary stimulus. In our view, the CARES Act, which was signed into law by President Trump on March 27th and is expected to provide the economy with a $2 trillion stimulus, has done more to stabilize leveraged credit markets than any actions thus far taken by the Fed, as such legislation more directly addresses the macro and fundamental challenges presently facing high yield companies. That said, the Fed’s recent actions, which have included several lending facilities designed to provide support to numerous fixed income markets, has also helped further stabilize the high yield and leveraged loan markets. Largely as a result of these actions, high yield bonds and leveraged loans rallied between March 23rd and March 31st.  This rally included the best five-day return for the high yield market dating back to 1996, even eclipsing any five-day rally witnessed during the 2008-09 Great Recession and its ensuing recovery.

However, following a sobering press conference delivered by the White House Coronavirus Task Force on the evening of March 31st in which Americans were warned to essentially prepare for the worst over the next couple of weeks, market sentiment soured considerably. As part of this update, the federal government extended its guidelines for social distancing and mitigation efforts through April 30th, with many states and local governments decreeing similar policies.

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High Yield Bond & Leveraged Loan Week in Review

Posted on March 27, 2020

March 20 - March 26, 2020

On Thursday, March 19th, in an effort to mitigate the burgeoning COVID-19 outbreak, California enacted the strictest state “lockdown” to-date, with similar actions then followed by multiple other states over the next few days. As a result, the economic implications associated with the essential closure of large parts of the U.S. economy have begun to set in. Meanwhile, in Europe, new COVID-19 cases and fatalities continued to increase at an alarming rate, an ominous sign for the U.S., which is believed to be a few weeks behind Europe in terms of progression of the virus. Major investment banks, such as Goldman Sachs and Morgan Stanley, slashed their U.S. economic growth estimates, with such firms now expecting record declines in second quarter 2020 annualized GDP of -24% and -30%, respectively. On Monday, March 23rd, in response to the deteriorating economic outlook and declining liquidity across multiple sectors and markets, the U.S. Federal Reserve announced an expansion in both the size and reach of its asset purchase program as well increased direct lending for small and medium-sized enterprises, with a pledge to do more as needed. Despite these actions, the failure of Congress to pass a stimulus package over the weekend contributed to a down day across risk markets to begin the week. In our view, with significant uncertainties regarding the length of state lockdowns and the size of the total fiscal and monetary policy response, DDJ believes that it is still premature to forecast the economic impacts of the current crisis over the next three-to-six months.

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High Yield Bond & Leveraged Loan Week in Review

Posted on March 20, 2020

March 13 - March 19, 2020

After a tumultuous five days of market activity ending Thursday, March 12th, the high yield bond and leveraged loan markets were enjoying a day of moderate gains and relative calm last Friday. Subsequently over the weekend, several actions taken by various levels of government led market participants to conclude that the COVID-19 outbreak would begin impacting economic activity far more tangibly than perhaps originally contemplated. The unexpected announcement by the Federal Reserve, which included a reduction of the Fed Fund’s rate to near zero as well as the re-initiation of its quantitative easing program, further confirmed these fears. These combined events sent equity futures tumbling on Sunday evening. Not surprisingly, when markets opened on Monday, all markets, including the high yield market, reacted negatively to this news. In our view, market participants likely perceived the actions taken by the Fed as a signal that things in the market and economy were much worse than originally thought.

As the week progressed, headlines related to the COVID-19 outbreak dominated news flow. It became clearer during the week that the guidance from the federal, state and local governments for citizens to practice social distancing as well as to reduce/restrict travel would have quite significant effects on the economy. Some notable headlines from the past week included the following;

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What Are The Main Benefits Of Including High Yield As Part Of A Strategic Asset Allocation?

Posted on February 28, 2020

There are many potential benefits of including a dedicated high yield portfolio as part of a long-term asset allocation, including improving its risk-adjusted-return profile, increasing diversification, and providing a consistent source of meaningful cash generation. In addition, as we discuss below, we believe that the high yield market (comprising both high yield bonds and bank loans) has structural inefficiencies that can be exploited through rigorous, bottom-up fundamental research and a risk management process focused on minimizing credit losses. Our view is that high yield is an asset class in which a skilled active manager can generate significant and sustainable outperformance over the long-term.

As displayed in the chart below, the high yield market, as represented by the ICE BofA U.S. High Yield Index, has generated impressive returns over the last 30-years with significantly less volatility than equities.

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Reflecting on a Bifurcated 2019 for High-Yield Bonds & Leveraged Loans

Posted on February 20, 2020

By David Breazzano, President, Chief Investment Officer, Portfolio Manager

In 2018, the high yield market ended the year on a low note. A negative return in December capped off one of the weakest quarters of high yield bond performance in history. Of course, this negative performance was not isolated to the high yield market. Rather, concerns surrounding trade tensions, economic growth and the trajectory of monetary policy weighed heavily on markets ranging from corporate bonds to equities. Many market observers were curious whether 2019 would bring more of the same or if markets would reverse course.

By way of background, I am by nature an optimistic person. This may seem counterintuitive given my chosen profession; after all, when it comes to investments in the high yield market, one must always be focused on what can go wrong. Having said that, I cannot help but view things through the prism of positivity. So, even in the face of dreadful performance to end 2018, I was cautiously optimistic about the prospects for the high yield market in 2019.

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What are Some Benefits of Investing in Middle Market Issuers?

Posted on February 14, 2020

The Portfolio Managers of DDJ’s U.S. Opportunistic High Yield Strategy, David Breazzano, Ben Santonelli and John Sherman, recently sat down and answered a handful of questions related to investing in the high yield market and DDJ’s distinctive investment philosophy.

This week, we highlight a question involving an area of the high yield market that is often ignored by the largest high yield managers: middle-market issuers.

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Do Relationships With Company Management Teams REALLY Matter?

Posted on February 6, 2020

The Portfolio Managers of DDJ’s U.S. Opportunistic High Yield Strategy, David Breazzano, Ben Santonelli and John Sherman, recently sat down and answered a handful of questions related to investing in the high yield market and DDJ’s distinctive investment philosophy. One of these questions related to the teams of people on the other side of the investment equation.

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RELEASE: DDJ Adds Two Industry Veterans to Business Development & Client Service Team

Posted on January 22, 2020

WALTHAM, MA, January 22, 2020 – DDJ Capital Management announces the addition of two industry veterans to its business development team. William G. (Bill) Porter and Meaghan K. Mahoney have joined DDJ to focus on consultant relations and new business development.

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Top 3 Blogs of 2019

Posted on January 7, 2020

Happy New Year!

Since we launched our blog last September, we have received a lot of positive support. We sincerely appreciate you taking time out of your day to read our thoughts on the market.  

Below, we have highlighted our three most popular blog posts from 2019. If you have a topic you would like for us to cover, please contact us.  We appreciate your feedback.

Cheers to a new decade!

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Chart of the Month: The Power of the Coupon

Posted on December 20, 2019

Consistent cash return that compounds over time

In a previous blog post, High Yield: Are Its Returns Too Closely Correlated to Equity for it to be Considered an Allocation to Fixed Income?, we analyzed performance data since 1998 and illustrated how on average, high-yield bonds performed in line or better than large cap equities on a rolling three- and five-year basis. Further, the volatility of high-yield bonds has been considerably lower than equities, resulting in stronger risk-adjusted performance. Observe the following long-term performance and risk statistics of high-yield bonds versus large-cap equities and small-cap equities, as shown by the S&P 500 Index and Russell 2000 Index, respectively, for the time period 4/1/1998 to 9/30/2019:

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