August 31, 2021
Guggenheim Third Quarter 2021 High-Yield and Bank Loan Outlook: Looking at Yields in High-Yield Credit
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Third Quarter 2021 High-Yield and Bank Loan Outlook. Titled “Looking at Yields in High-Yield Credit,” the report explains why now is a good time for investors to conduct a relative value assessment of corporate bonds and bank loans.
Among the highlights in the 16-page report:
- Our credit spread dashboard shows that secondary loan discount margins are cheap relative to corporate bond spreads, which is explained by differences in benchmark rates as well as higher call risk in loans.
- Call risk significantly limits near-term upside potential. Investors can look to the primary market where call protection is longest and find that loan yields look comparable to corporate bond yields in the BB-rated and B-rated groups.
- We expect average annual credit loss rates of 110 basis points in high-yield corporates over the next three to five years, below a historical average of 261 basis points. In loans, we estimate an average annual credit loss rate of 86 basis points, which is lower than corporates due to a higher recovery rate.
- Our forward-looking credit loss rate estimates result in positive loss-adjusted credit yields for most credit segments, but reveal little cushion in CCC-rated corporates.
- A focus on BB-rated and B-rated cohorts is prudent given record low yields and could help limit portfolio volatility if a correction materializes.
- Second quarter U.S. real gross domestic product (GDP) registered 6.6 percent annualized growth. We expect sequential growth will slow from there heading into 2022: The impact of reopening businesses, which happens only once, will start to fade, and the impact of fiscal stimulus will cool, even with another spending package likely on the way. This natural slowdown in activity as we move through peak growth could present challenges if growth slows more than expected.
- Inflation is also likely to fall given that much of the recent increase is coming from categories suffering temporary supply chain disruptions.
- In this environment, different segments of both high-yield corporate bonds and bank loans offer unique opportunities, and a properly diversified credit portfolio should have exposure to both asset classes given their comparable value.
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 $255 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 275+ 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 6.30.2021 and include leverage of $16.3bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.
Investing involves risk, including the possible loss of principal. The potential impacts of the COVID-19 outbreak are increasingly uncertain, difficult to assess and impossible to predict, and may result in significant losses. 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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