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Summary
- The U.S. fixed income market is massive at around $40 trillion. The largest subcategory is U.S. Treasury debt.
- Mortgages represent the second largest single subcategory of the bond market. This helps to explain why problems in the mortgage market nearly took down the entire financial system in 2008.
- The surprise to many investors is that the non-investment grade sector of loans and bonds has grown to become a major asset class itself, now over $2.5 trillion.
By Heather Rupp, CFA, Director of Communications and Research Analyst for Peritus Asset Management, Sub-Advisor of the AdvisorShares Peritus High Yield ETF (NYSE Arca: HYLD)
The U.S. fixed income market is massive at around $40 trillion.1 The largest subcategory is U.S. Treasury debt. Mortgages represent the second largest single subcategory of the bond market. This helps to explain why problems in the mortgage market nearly took down the entire financial system in 2008. Yet, a sizable 22% of the fixed income universe is represented by "corporate credit" through leveraged (floating rate bank) loans, high yield bonds and investment grade corporate bonds, together making this category even larger than the mortgage market.
What comes as a surprise to many investors is that the non-investment grade sector of loans and bonds has grown to become a major asset class itself, now over $2.5 trillion. By looking at the chart above, it is obvious that corporate credit plays a major role in financial markets and high yield bonds and floating rate loans a significant piece within that.
These are large and growing areas of the market and worthy of investor attention. We have recently written about the idea that high yield bonds can offer investors both higher yields and lower duration relative to other fixed income asset classes, and have posted higher returns over the past 25 years. As we noted in our commentary last week, we have the flexibility to include both high yield bonds and floating rate loans within our portfolio, which we believe allows us to expand our investment universe, focusing on where we see the most value relative to risk. These are deep markets with thousands of issuers, allowing us ample opportunity for security selection as we work to meet our investment object of a high current income with the potential for capital gains, all the while working to manage risk.
1 From the publication "Outstanding U.S. Bond Market Debt" release by SIFMA, data as of 3/31/16. Koch, Fer, Miranda Chen, and James Esposito. "CS Credit Strategy Monthly," Credit Suisse US Credit Strategy. April 11, 2016, p.16, 42
Although information and analysis contained herein has been obtained from sources Peritus I Asset Management, LLC believes to be reliable, its accuracy and completeness cannot be guaranteed. Information on this website is for informational purposes only. As with all investments, investing in high yield corporate bonds and loans and other fixed income, equity, and fund securities involves various risk and uncertainties, as well as the potential for loss. Past performance is not an indication or guarantee of future results.
This article was written by
AdvisorShares
AdvisorShares is a leading provider of actively managed exchanged-traded funds (ETFs), offering a diversified and transparent suite of core and alternative strategies. AdvisorShares provides educational support to help financial advisors and investors understand the benefits of actively managed ETFs and their underlying investment strategies.
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Business relationship disclosure: AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). This article was written by Heather Rupp, CFA, Director of Communications and Research Analyst for Peritus, the portfolio manager of the AdvisorShares Peritus High Yield ETF (HYLD). We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. This information should not be taken as a solicitation to buy or sell any securities, including AdvisorShares Active ETFs, this information is provided for educational purposes only.
To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website http://AdvisorShares.com .
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