Searching for Yield in the US: Different Forces Operating Across Asset Classes
Easier US financial conditions, despite ongoing Fed policy normalisation, have prolonged the search by investors for higher yielding asset classes.
Institutional investors have been lured into an overheating US leveraged loans market, a previously less popular asset class, during 2017 in their search for higher yields.
Covenant-light leveraged loans dominate the investment benchmarks for this asset class, and passive investment strategies deployed by institutional investors could simply prolong current market overheating.
High yield corporate bonds are less sensitive to short-term interest rates and Fed policy due to much shorter maturities compared to other segments of the corporate bond market, while, historically, significant losses have been short-lived.
The S&P500 dividend pay-out ratio is currently high by post-1993 standards and its sustainability will hinge critically on the prospective performance of corporate profits.
The duration of the search for yield in the US at current prices and valuations will be highly influenced by the ability of corporations to generate higher profits, including any capability of raising selling prices.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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