November 17, 2017 | by Matthew Pasts, CMT, CEO, BTS Asset Management, Inc.

On BTS’ Recent Shift to a Defensive Portfolio Allocation

Last week the high yield bond market weakened after a long period of relative stability. BTS rotated out of high yield as an asset class in our Bond Asset Allocation/Tactical Fixed Income and High Yield strategies. We think additional volatility is likely and downside risk is unattractively high.

Following are key points relating to risk to high yield bonds at present:

BTS is monitoring support levels in the bond markets and signs of trend and momentum in the stock market. A selloff in either market could be followed by quick stabilization. Such a development might create an opportunity to re-enter high yield bonds at more favorable prices.

In summary, while BTS sees an increase in volatility as probable, we also anticipate potential trading opportunities to the extent that inflation increases and interest rates move higher than is widely expected at this time. We believe volatility in the stock market is also going to increase as the normalization of monetary policy creates added risk of recession. Though there may be a chance that the carry trade on interest and low volatility continue near term, we expect a more volatile 2018 for the high yield sector and markets in general.

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It should not be assumed that investment decisions made in the future will be profitable or guard against losses, as no particular strategy can guarantee future results or entirely protect against loss of principal. There is no guarantee that the strategies discussed will succeed in all market conditions or are appropriate for every investor.

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