The yield breakevens, calculated as yield divided by duration, indicate by how much can yields rise, or credit spreads widen, before incurring capital loss equal to annual yield accrued on investors’ holding. A ratio of 1.0 implies that 1%point increase in yield or spread eliminates the entire year’s worth of yield accrual. As evidenced on the chart, HY (up to 3 years maturity in particular) and syndicated loans (modelled with a 3-year remaining life) offer investors higher protection than more sensitive investment grade credit and agency mortgage-backed securities.
From the yield and breakeven perspective, US HY bonds maturing in less than 3 years are the most attractive. In an environment of lower likelihood of further rising risk-free rates, it would take credit spreads widening of up to 5.5%points from current levels to eliminate their annual 9.1% return accrual. In case of floating rate loans, the risk is limited solely to spreads widening. Nevertheless, elevated refinancing risks on shorter term HY require active credit management and deep understanding of each issuer.
