Podcast: Money Tree Investing Digs into High Yield Markets
Dave Breazzano talks why the perceived risk of credit default is higher when investing in high yield bonds & loans, but the reward can be too
The head of Polen's High Yield team, Dave Breazzano, sat down with the Money Tree Investing podcast to discuss investing in high yield bonds and loans, the economy, and why the time is now to look at high yield debt.
Podcast Highlights
- Dave has been investing in the high yield market since the 80’s and mentions that the current macroenvironment differs from that of the past in part due to rising interest rates. After a 40-year trend of declining rates, most investment professionals are facing a dynamic they have never experienced.
- With the continuous decline in rates, investors were not making money and locking in a real loss for owning fixed income. That's not healthy, according to Dave. Today, he says we are seeing the consequences of that environment with the demise of certain banks.
- He suggests we are now in an era of more appropriate rate levels where bond and loan investors can earn a return for investing in fixed income.
- With investing in high yield bonds and loans, the perceived risk of credit default is higher, where a company may not pay on time or go bankrupt. In return for that risk, there's a higher reward or a higher yield. Dave says, “For investors like us, we can participate in that part of the market to try to find those gems that provide this high yield, and the company never defaults.”
- He and the Polen High Yield Team deeply analyze each individual company on its own merits and how it will perform based on their view of the future economy and take a targeted approach to selecting their investments.
- Dave also notes that, by historical standards, default rates are very low, trending around 1% or lower. Default rates typically average 3-4%.
- People often overlook the recovery rate, according to Dave. When a bond or loan defaults, it rarely goes to zero. Historically, the recovery rate has been around 41 cents on the dollar. Dave says, “We can enhance the recovery rate to get back more than 41 cents on the dollar. The correct math considers the default rate and recovery rate when computing the loss rate.”
- Dave closes by saying, “Bonds have been volatile of late, but over time, they're less volatile than equities. So, you get a high yield. In some cases, you can achieve double-digit yields, over 10%, with some amount of price stability because they're bonds not stocks. A couple years ago, with a 4% or 3% interest rate environment, you couldn't make much money in fixed income. Now, you can.”
We like volatility because it creates opportunity. People get scared, and they start selling everything, good and bad, at the same price.
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