Our Multi-Asset Global Allocation Model has been 20% long on US junk bonds since Oct 26, 2009. We have also been 10% long on US Senior Bank Loans. This allocation has not only contributed high single digits yield bu, but also capital gains. Senior Bank Loans have provided 15% capital gains over this period of less than four months. Recently, some of the capital gains on high yield bonds have been lost.
According to Lipper, last week nearly $1 billion was withdrawn from US funds that hold high yield bonds. Spreads from US treasuries have widened by more than 100 basis points since Jan 11 and now stand at nearly 700 basis points as measured by Bank of America Merrill Lynch index.
Impetus behind the sell off seems to be sovereign credit risk and slowing growth in US. Our analysis shows that although not immune from sovereign risk and slowing economy, US corporate credit fundamentals will continue to improve. This presents an opportunity to add to our high yield allocation. We will focus on closed end funds that trade at a discount. The timing of the change to our Multi-Asset Global allocation model will be determined by ZYX Change Method technical screen.
