Bridget Hughes: Well, I know high yield is not necessarily as sensitive to interest rates as certainly Treasuries or even high-grade corporates, but I know the level of interest rates currently is on a lot of people's minds. Can you talk about how the portfolio would respond to rising interest rates?
Jeff Gary: Sure. It's a very good question and a question we've gotten a lot from our investors. I would say that the last three weeks with the potential slowdown in the economy people are a little less concerned, but it is something you need to take into account. So there are couple factors that we tell investors that the end result is that high yield and this fund should have a lot less impact by rising interest rates.
First, over a 15-year basis, high yield has only a 0.1 correlation with Treasury rates. Of all the fixed income asset classes out there, it has by far the lowest.
Second, leveraged loans, which represents 25% of our portfolio, are based upon floating LIBOR rates. So, therefore, a portion of our portfolio stands to benefit from rising short-term LIBOR rates.
Third, JPMorgan did a study where they examined the last 30 years any time that Treasury rates rose by 100 basis points or more, and they found that in each of those time periods high yield had positive returns, except for 1994 with a minus 1.5% return. And they also compared that with investment grade corporate bond returns, which have a much higher correlation with Treasuries. And the returns of high yield trounce that of investment grade bonds.
The last piece that I'd mention and doesn't get a lot of press, but I think about it and talk to the investors in terms of, it's not just the absolute spread to Treasuries, and right now with the recent sell-off, we're at 750 basis points, definitely wider than a long-term average. But it's in essence the bang for the buck that you get from going from risk-free Treasury rates out into the spread of high yield.
And if you take 750 divided by a 3%, 3.5% 10-year, you have a 2.5 times multiple of the spread compared to that underlying Treasury rate. And the long-term average is 1.1. The only time it's been higher is the recent credit crisis and at the peak of defaults in October 2002. So that premium you're getting to go into high yield versus risk-free Treasuries is extremely attractive now.