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Don’t Be Tempted by CCC Bonds and Loans

Lower-quality credit spreads have more potential to widen than tighten.

October 29, 2019


High-Yield and Bank Loan Outlook

Fourth Quarter 2019

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:

  • At three-year wides, spreads might look appealing. However, when we compare the potential upside in another year of coupon-clipping and some spread tightening to the potential downside in a year of spreads widening and high defaults, current CCC spreads are not enough compensation to justify the risk.
  • As of Sept. 30, 2019, high-yield CCC spreads are at 1,037 basis points, while CCC loans are at 1,329 basis points. Both are at their widest levels since November 2016.
  • Exposure to CCC-rated debt in total leveraged credit (aggregating high-yield bonds and institutional loans) is only 8 percent, the lowest since 2000.
  • Although the market exposure to CCC is already smaller than in the past, investors should continue to limit exposure to this rating category despite recent cheapening because of the asymmetry of potential spread outcomes.
  • In a bear market scenario, we think CCC corporate bond spreads could widen by another 1,300 basis points, while our analysis of a bull market scenario suggests they could tighten by 430 basis points.
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This material contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions 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. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. 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, 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. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

One basis point is equal to 0.01 percent.

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Investing involves risk, including the possible loss of principal.

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, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

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