High-Yield and Bank Loan Outlook - October 2014

Leveraged credit suffered from heightened volatility over the third quarter as mutual fund investors withdrew from the sector amid concerns about frothy valuations and talk of a credit bubble. We believe the high-yield bond market correction this quarter is healthy and overdue, but investors can expect choppier waters ahead. One segment we believe may help limit near-term volatility risk while capturing strong returns is middle-market debt.

October 06, 2014    |    By Guggenheim Partners

Report Highlights

  • The Credit Suisse High-Yield and Leveraged Loan Indexes posted mixed performance through the quarter, declining by 1.9 percent and 0.3 percent, respectively. This was the first correction in nearly a year, and we view it as healthy and overdue.
  • With the potential for more volatility ahead, one segment that may help limit volatility while capturing strong returns is middle-market debt.
  • Middle-market debt has historically been held by a smaller, dedicated investor base — something that we believe has historically helped generate higher premiums for less volatility.
  • During the third quarter, middle-market corporate bonds, as represented by the Merrill Lynch High Yield Index, lost an average of 1.4 percent, compared to a 2.3 percent loss for high-yield bonds with greater than $750 million outstanding. Middle-market debt has outperformed larger debt by 58 basis points annualized since 1997 with less volatility. We believe the middle-market segment can continue to add significant value to our credit strategies.



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