July 17, 2019
Guggenheim Third Quarter 2019 High-Yield and Bank Loan Outlook: High-Yield Corporate Bond Spreads and Bank Loan Discount Margins Widen When the Federal Reserve Cuts Interest Rates
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Third Quarter 2019 High-Yield and Bank Loan Outlook. Titled “High-Yield Credit in a Fed Easing Cycle,” the report reflects the outlook for leveraged finance in an environment of potentially aggressive monetary policy.
Among the highlights in the 14-page report:
- Investors may be tempted to go down in quality in anticipation of a Fed-induced rally in leveraged credit. History suggests this would be ill-advised. High-yield corporate bond spreads and bank loan discount margins typically widen when the Fed is lowering interest rates.
- If the market truly believes that a slowing U.S. economy warrants 75 basis points in rate cuts over the next six months and more in 2020, then credit spreads should be wider than current levels. This was true even during the Fed’s mini-easing cycle in 1998, when 75 basis points of rate cuts successfully extended the economic cycle, but not the credit cycle.
- On average since 1986, high-yield corporate bond spreads and bank loan discount margins widened by 131 basis points and 294 basis points during Fed easing periods, respectively.
- Some market participants draw comparisons between today and the experience in 1998, when the Fed successfully extended the economic cycle. We argue that this comparison warrants some caveats as it relates to credit, since the mini-easing cycle in 1998 was followed by several years of above-average default rates.
- Even if the Fed eases rates aggressively, our base case is that at year-end, high-yield corporate bond spreads and bank loan discount margins will be wider than where they ended the first half of 2019.
For more information, please visit www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $209 billion¹ in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.
1Guggenheim Investments assets under management are as of 3.31.2019. The assets include leverage of $11.3bn for assets under management. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their value to decline. High-yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.
One basis point is equal to 0.01 percent.
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