High-Yield: The Place To Be, Now More Than Ever

Roger Lowenstein's most recent book, America's Bank: The Epic Struggle to Create the Federal Reserve, is well worth reading if for no other reason than it illustrates important the human element is in the conduct of both monetary and fiscal policy. Institutions don't make decisions, people do. Furthermore, the humanity of economic policy is never more important than in times of extremes-times like now.
Below, I briefly discuss last Wednesday's FOMC decision. However, the majority of this report is dedicated to my investment thesis that, as lackluster as the macroeconomic situation is, the current environment has created dislocations that nimble, sophisticated investors can exploit to add alpha.
I focus on one area I see as being ripe with opportunities: the high-yield debt sector. Specifically, I argue that the potential for above-average gains exists in the market for investors who buy non-investment grade shorter-term paper from companies that are in (or correlated with) the energy sector.
Last Week's FOMC Decision
Given the tremendous pressure the FOMC was under, and the data available to the Committee, virtually no one was shocked by its decision last Wednesday to leave rates unchanged. Furthermore, as expected, in their statement, the FOMC cited labor market weakness along with "transitory effects of past declines in energy and import prices."
Wednesday's report was not entirely devoid of news. The "dots" shifted... Read more