/institutional/perspectives/sector-views/high-yield-corporate-bonds-limited-spread

High-Yield Corporate Bonds: Limited Spread Dispersion Creates Credit Picking Opportunities

Assets in the high-yield market trading at discounts to par have the potential for price appreciation as they approach maturities.

August 02, 2022


This High-Yield Corporate Bonds sector report is excerpted from the Third Quarter 2022 Fixed-Income Sector Views.

The combination of high inflation, the market pricing in the most aggressive Fed tightening path since the 1990s, Russia’s invasion of Ukraine, and continuous China COVID-related lockdowns led the high-yield corporate bond market to suffer a loss of 14 percent in the first half of 2022—the worst first half on record—of which 8.6 percentage points were driven by credit spreads widening relative to Treasurys.

No sector offered shelter from losses this year. Even those benefiting from high inflation, such as energy and materials, posted -3.9 and -3.8 percent excess returns, respectively. With index spreads at 550 basis points, we would normally expect the range of the tightest-to-widest industry spreads to be about 700 basis points. But that range sits at just 300 basis points as of July 14, with utilities offering the tightest spread of 367 basis points and telecom offering the widest at 667 basis points.

Limited industry dispersion relative to history has two possible explanations. First, unlike past experience when market stress was concentrated in a particular industry, such as in telecom during the late 1990s, financials and real estate in the 2000s, and energy in the last decade, markets expect similar stress across all industries in the next recession without any one industry being a focal point. Second, something is driving sellers to indiscriminately de-risk, whether this is due to the speed of fund redemptions or the inability to discern the industry winners from losers. If the latter is true, then some credits are already oversold, which we believe should yield strong future returns for credit pickers.

There have been few chances in recent history when 9 percent average yields have coincided with sufficient market liquidity for investors to take advantage of these levels. And although we expect the next six months to see more default and downgrade activity, spreads sitting around the 70th percentile of historical observations offer a nice cushion, but we are still cautious in our credit selection. Nonetheless, with most of the high-yield market trading at discounts to par, creditworthy bonds have the potential for price appreciation once they approach maturities.

Very Little Industry Dispersion in the High-Yield Index

Very Little Industry Dispersion in the High-Yield Index

Source: Guggenheim Investments, Bloomberg, ICE Index Services. Data as of 7.14.2022. Shaded areas represent recession.

—By Thomas Hauser and Maria Giraldo

 
Important Notices and Disclosures

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-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 risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk.

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 Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

©2022, Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC.

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FEATURED PERSPECTIVES

November 21, 2022

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The stress in this credit cycle is driven by unforgiving high interest rates.

November 10, 2022

Fourth Quarter 2022 Fixed-Income Sector Views

Market and value updates by sector.

November 04, 2022

The Jobs Data Trend Is Duration’s Friend

October jobs data suggests a cooling labor market.


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© Guggenheim Investments. All rights reserved.

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 Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.