Junk Bond Returns Beat Every Asset Class YTD

The search for safe spots in the market rout so far this year has resulted in some curious hiding places. The big rotation out of equities in the end of 2009 and into credit has accelerated, and while IG initially was considered the frontrunner for the safe credit category, it is surprisingly junk debt that has emerged as the best performing sector of 2009. And even within the category there are strong bifurcations, with traditional countercyclicals outperforming the benchmark, while financials and autos being avoided like the plague. As rotations subside and funds commence taking profits in light of once again skyrocketing volatility, hoping to weather the storm, the most successful sectors are the ones likely poised for the sharpest and quickest reversion. charts and data courtesy of bofa.

Highlights of February market action:

• HY index dropped 3.5% for the month, gave back half of its January advance.
• Every major asset class outside of cash posted losses in February: IG -1.6%, Treasuries -1.4%, equities -11%, EU HY -3.2%, EM Sovereigns -1.0%.
• The best relative performance outside of cash was registered in nondistressed HY, which slipped by only 0.3% during the month.
• So far YTD, HY is marginally positive, at 1.7%. This compares to declines in other major asset classes, including 5.9% in Treasuries, 1.2% in IG, and 19% in equities.
• Quality differentiation remains key: BBs were down 1.4% in February vs. 7.7% drop in CCCs. Over the past three months, BBs were the best performing segment across all asset classes that we track with a +12.4% gain.
• Level of distress remains elevated in both IG and HY markets: our distress ratio (proportion of bonds trading at 1,000bp and higher), is at 12.1% among IG issuers and 68.2% in HY. Both levels are roughly unchanged from January. Total par amount of bonds trading at distressed levels stands at $811bn.
  
  

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