Market Vectors’ Fran Rodilosso on the “Coupon Clipping” Year in High Yield and His Outlook for 2014

Business Wire


The image of “coupon clippers” physically removing the interest coupons from bond certificates and presenting them for their periodic interest payments is not typically one that would be associated with the high yield universe, but 2013 was not a typical year. According to Fran Rodilosso, fixed income portfolio manager with Market Vectors ETFs, this year was the first “coupon clipping” year for high yield in at least two decades.

“The high yield bond market rarely behaves as a ‘coupon clipping’ fixed income investment, but 2013 has been somewhat remarkable,” said Rodilosso. “As the year comes to a close, prices for high yield bonds will have ended the year essentially flat, while their total return was above six percent, representing the current income supplied by the asset class.”

Rodilosso noted, “Normally, we would end the year talking about the high yield bond market’s performance being well below or well above that average yield range, but in a year where 10-year Treasury yields have jumped by about 1.25 percent, clipping coupons may not have been such a bad move.”

Looking at the overall high yield environment as we head into the New Year, Rodilosso sees some reasons for caution, as well as cautious optimism. “Credit spreads are ending the year tighter than they were at the beginning,” he said. “But they still remain above their historical tight levels and have proven to be fair compensation in what remains a low default environment.”

Rodilosso also pointed to a sub-sector of the high yield universe which has outperformed the overall space on average since December 31, 2003. “Fallen angels, formerly investment grade issuances that have been downgraded to below-investment grade status, have outperformed this year, as of December 27, 2013, with the BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), topping the broad high yield benchmark, the BofA Merrill Lynch U.S. High Yield Master II Index (H0A0), by approximately 170 basis points,” said Rodilosso. “This is particularly noteworthy since fallen angels typically have longer durations, meaning they are more sensitive to changes in interest rates than the high yield market as a whole.”

Among Market Vectors fixed income ETF offerings is the Fallen Angel High Yield Bond ETF (NYSE Arca: ANGL), a fund that focuses on U.S. dollar denominated “fallen angels,” a sub-set which currently represents approximately 15 percent of the overall U.S. dollar denominated corporate high yield bond market.

“Historically, fallen angel high yield corporate bonds have outperformed other high yield corporates with similar risks,” said Rodilosso. “2013 was certainly no exception, and the conditions that appear likely to carry over into the New Year could continue to bode well for the fallen angel sub-sector.”

Mr. Rodilosso has 20 years of experience trading and managing risk in fixed income investment strategies, and currently oversees Treasury-Hedged High Yield Bond ETF (NYSE Arca: THHYTM), Emerging Markets Local Currency Bond ETF (NYSE Arca: EMLC®), Emerging Markets High Yield Bond ETF (NYSE Arca: HYEM®), Investment Grade Floating Rate ETF (NYSE Arca: FLTR®), International High Yield Bond ETF (NYSE Arca: IHY®), Emerging Markets Aggregate Bond ETF (NYSE Arca: EMAG) and Renminbi Bond ETF (NYSE Arca: CHLC®). As of November 30, 2013 the total assets for these ETFs amounted to approximately $1.4 billion.

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About Market Vectors ETFs

Market Vectors exchange-traded products have been offered since 2006 and span many asset classes, including equities, fixed income (municipal and international bonds) and currency markets. The Market Vectors family totaled $22.5 billion in assets under management, making it the seventh largest ETP family in the U.S. and 10th largest worldwide as of November 30, 2013.

Market Vectors ETFs are sponsored by Van Eck Global. Founded in 1955, Van Eck Global was among the first U.S. money managers helping investors achieve greater diversification through global investing. Today, the firm continues this tradition by offering innovative, actively managed investment choices in hard assets, emerging markets, precious metals including gold, and other alternative asset classes.

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Index returns assume the reinvestment of all income and do not reflect any management fees or brokerage expenses associated with Fund returns. Investors cannot invest directly in the Index. Returns for actual Fund investors may differ from what is shown because of differences in timing, the amount invested and fees and expenses.

BofA Merrill Lynch U.S. High Yield Master II Index (H0A0) is comprised of below-investment grade corporate bonds (based on an average of Moody’s, S&P and Fitch) denominated in U.S. dollars. The country of risk of qualifying issuers must be an FX-G10 member, a Western European nation, or a territory of the US or a Western European nation.

BofA Merrill Lynch US Fallen Angel High Yield Index (H0FA), a subset of H0A0, is comprised of below- investment grade corporate bonds denominated in U.S. dollars that were rated investment grade at the time of issuance.

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