Where to hide in the junk bond market as recession worries mount

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Smoking is bad for your health, but bonds issued by riskier food, beverage and tobacco companies have always been the best performers when times are tough.

That’s one of the key takeaways from a new report examining which parts of America’s high-yielding HYG,
-0.09%,
or “junk-bond JNK,
-0.07%,
“The market has held up better when economic recessions have hit over the past two decades.

“The ‘R word’ has come up more frequently since the yield curve inverted from 2 to 10 on April 1, wrote Martin Fridson, chief investment officer of Lehmann Livian Fridson Advisors, in a report released Tuesday for S&P Global. Market intelligence.

For investors concerned about the next recession, Fridson looked at the total returns of the 20 largest industries in the ICE BofA High Yield Index (see chart) for the top performers of the past three recessions.

Segments that consistently ranked at the top were healthcare and utilities, in addition to food, beverage and tobacco (see, “all” category), when looking 12 months prior to start of the recessions of 2001, 2008-2009 and 2020, through their consequences.

These three sectors of junk bonds have held up the best in the last three recessions

Martin Fridson, ICE Indexes, National Bureau of Economic Research

It should be noted that Fridson excluded the 12 months leading up to the 2020 recession, due to “the unanticipated outbreak of COVID-19” that triggered the brief two-month economic downturn.

Within these parameters, several industries had “very inconsistent relative performance”, including telecommunications, number 1 in the 2008-09 recession, but the worst, at number 20, in the 2001 recession. Retail trade has also posted historically uneven performance.

But it’s autos and auto parts, diversified financials and leisure that have historically been the worst performers during a downturn, according to the report.

While the timing of the next recession remains a matter of debate, investors have focused on its likelihood as the Federal Reserve shifted its focus to aggressively tightening financial conditions to cool inflation to 40-year highs, but without derailing the economy.

High yield bonds have often been considered a proxy for stocks. In terms of the SPX of the S&P 500 index,
+1.61%
sector performance, the big winners from a difficult start to 2022 were energy SP500.1010,
-0.96%
(+45%), utilities SP500.55,
+0.61%
(up 6.2%) and Consumer Staples SP500.30,
+1.47%
(up 2.7%) on the year to Tuesday, according to FactSet.

But for the most part, stocks and bonds have been in the red this year, partly because the Treasury is reporting TMUBMUSD10Y,
2.941%
increased significantly in anticipation of a series of potentially large increases in the The Fed’s key interest rate In the coming months.

The US investment grade corporate bond market has already seen its worst performance since the collapse of Lehman Brothers, where yields now exceed 4%versus about 6.4% high yield.

To see: Extent of likely Fed tightening not priced in by markets, IMF official says

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