/perspectives/sector-views/high-yield-and-bank-loan-outlook-august-2021

Looking at Yields in High-Yield Credit

A properly diversified credit portfolio should have exposure to both high-yield corporate bonds and bank loans.

August 31, 2021


High-Yield and Bank Loan Outlook

Third Quarter 2021

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook 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.
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This material contains opinions of the author, 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, 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 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.

One basis point is equal to 0.01 percent.

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

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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, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

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