Flash Update - Short-Biased High Yield Portfolio

Historical Relationship between HY Returns and Treasury Yields is Breaking Down 

Currently the historical relationship between interest rates and returns achievable in the High Yield market is breaking down.  Traditionally, higher interest rates is a result of stronger underlying economic activity.  In the current market environment, higher rates is a result of the expected removal of exogenous Fed accommodation.    

Historically, higher interest rates foretold strong growth and higher rates of return in the High Yield market.  Today, higher rates are expected to result in a drag on consumer activity and a more challenging environment for marginal and highly levered corporate issuers.  Almost immediately after May 22^nd when Bernanke acknowledged that QE accommodation may slacken in the 2^nd half of 2013, high yield investors began to adjust their expectations.  Institutional investors immediately started looking at high yield as an asset class facing a challenging outlook as rates rise rather than facing an accommodative outlook as rates rise. 

The graph above shows how the historical correlations between higher 2-Year Treasury rates and returns in the High Yield market has flipped from POSITIVE to NEGATIVE in early June 2013.  This is the first time that this has occurred in any significant way since prior to the Great Recession in 2008.  

Tradex has found a tremendous amount of catalyst-driven, fundamentally weak, high yield credits that together have created a tremendous opportunity to be short.  This time around, as interest rates rise, these HY companies will likely start to crack.  Tradex is focused on developing absolute return strategies that can take advantage of rising rate environments.

Tradex Global Advisory Services, LLC

investorrelations@thetradexgroup.com 

203-863-1500

@Tradex_Global