Avoid HY Credit: Astoria on CNBC


Astoria is fortunate to be a contributor to major media outlets such as CNBC. This week, Astoria’s CIO, John Davi, appeared on CNBC to discuss HY Credit and Bitcoin. You can watch the various interviews by clicking below:

  • High Yield Credit segment (click here)

  • Bitcoin segment (click here)

  • Full interview (20 minutes; click here)

Avoid bonds like the plague. Inflation is the death of bonds. There is too much bond supply, and nobody is stepping up to buy them. The 10 year is heading towards 3% in our view. It will not be a straight line to 3%, but we think it will ultimately get there in time. Only extremely specific investors that have strict liabilities they need to match with income should be in bonds. Otherwise, if you are looking for relatively low risk investments (which bonds are not right now), consider parking your money into ultra-short duration bond funds (less than 1 year duration) until the 10 year settles down. Watch tickers like ARKK, QQQ, TLT, and IEF to see the market’s reaction to higher rates.


Cyclicals & inflation sensitive assets remain attractive in Astoria’s view. We still think there is more upside in these cohorts as interest rates rise higher but acknowledge that a good portion of their margin of safety has eroded. Back in Q2 2020, ETFs like XME, COPX, RING, & IWM were trading at 6-10 P/E ratios. Valuations have doubled since then!


What is not priced into stocks? We believe higher taxes are coming in 2022, but we do not think the market is pricing that risk in. Stocks can still rally with higher taxes, but investors need to be more selective as we transition out of the early part of this new economic cycle. Value, cyclicals, and commodities will get picked up in momentum/trend following strategies which should be a tailwind for this cohort.


HY Credit: We think this asset class is terrible from a risk/reward standpoint. Why take the risk of owning HY Credit when credit spreads are very tight? Yes, HYG yields 5%, but it can fall 20-30% during a recession which it did in 2008/2020.


As opportunistic ETF model managers, we would much rather own high dividend paying stocks than HY Credit. For instance, SDY has produced double the CAGR of HYG over the past 10 years. Yes, it has come with higher volatility levels, but its risk adjusted return (i.e., Sharpe Ratio) is higher than HYG.


In short, with HY Credit you get all the downside and little upside. With stocks, you get all the downside, but you are compensated for that risk by getting all the upside. Why on earth would you want the risk/return profile of HY Credit unless you have strict liabilities you need to offset? If you are looking for the best return per unit of risk, avoid HY Credit like 3rd period French class (credit goes to the movie Ocean’s Eleven; click here).


Best,

Astoria Portfolio Advisors


Astoria Portfolio Advisors Disclosure: At of the time of this writing, Astoria held positions in XME, COPX, RING, and QQQ on behalf of its clients. Past performance is not indicative of future results. Any third-party websites provided on www.astoriaadvisors.com are strictly for informational purposes and for convenience. These third-party websites are publicly available and do not belong to Astoria Portfolio Advisors LLC. We do not administer the content or control it. We cannot be held liable for the accuracy, time sensitive nature, or viability of any information shown on these sites. The material in these links is not intended to be relied upon as a forecast or investment advice by Astoria Portfolio Advisors LLC, and does not constitute a recommendation, offer, or solicitation for any security or any investment strategy. The appearance of such third-party material on our website does not imply our endorsement of the third-party website. We are not responsible for your use of the linked site or its content. Once you leave Astoria Portfolio Advisors LLC's website, you will be subject to the terms of use and privacy policies of the third-party website. Refer here for more details.


Photo Source: CNBC