August 24, 2022
Guggenheim Third Quarter 2022 High-Yield and Bank Loan Outlook: Credit Yields Look Attractive Despite Rising Recession Risks
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Third Quarter 2022 High-Yield and Bank Loan Outlook. Titled “Credit Yields Look Attractive Despite Rising Recession Risks,” the report explores opportunities for credit investors at a time of rising yields for both high-yield corporate bonds and leveraged loans.
Among the highlights in the 16-page report:
- Although July saw a solid recovery for risk assets, a looming concern is that aggressive Federal Reserve (Fed) policy will trigger an economic recession in the United States, a risk that rises with data showing stubbornly persistent inflation even as economic activity cools.
- Coming off the worst first half on record, when returns were negative 14 percent, high-yield investors are understandably anxious. So too are holders of leveraged loans, which performed better, but still declined by 4.4 percent.
- The probability of a recession in 2023 is rising meaningfully, but there are some indications that the recession may have already arrived.
- In the lead up to recession, we expect to see corporate earnings outlooks fall, more credit downgrades than upgrades, and default activity rise from its current low.
- Strong balance sheets that boast a healthy liquidity profile and sticky cash flows to cushion a pullback in economic activity will be in demand.
- As we navigate downside risks, our approach is to select the best credits within industry silos rather than avoiding cyclical industries altogether. For example, we have been finding value in select names within the consumer cyclical space which investors tend to avoid in recessions.
- We believe some companies in out-of-favor categories are positioned to survive a downturn due to their healthy liquidity profiles and sticky cash flows, which often come from long-term contracts in place or issuer bargaining power.
- High yield corporate bond yields are nearly 8 percent, and leveraged loan yields are nearly 9 percent.1 Each has traded at average yields of 6.3-6.4 percent since 2010.
- There are only a few periods in the last decade where yields have been as high, and many credit investors later regretted missed opportunities.
For more information, please visit www.guggenheiminvestments.com.
1. Source: Guggenheim Investments, Bloomberg. Total return data as of 6.30.2022. Yield data as of 8.5.2022. High-yield corporate bonds are represented by the ICE BofA U.S. High-Yield Index. Leveraged loans are represented by the Credit Suisse Leveraged Loan Index.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $228 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 250+ 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 6.30.2022 and include leverage of $18.3bn. Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, 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 values 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. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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