/perspectives/sector-views/high-yield-and-bank-loan-outlook-february-2020

The Relative Value Case for Bank Loans Over High Yield

Loans present an opportunity to move up the capital structure with better spreads and yields than high-yield corporate bonds.

February 11, 2020


High-Yield and Bank Loan Outlook

First Quarter 2020

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

  • Economic data suggest the Federal Reserve has successfully pushed off a recession by cutting rates and injecting significant amounts of liquidity. After tightening notably at the end of 2019, we expect credit spreads to move sideways over the next quarter, with possible widening resulting from the coronavirus outbreak.
  • The outperformance of high quality over low quality in 2019 highlights the realities within credit, namely that fundamentals are deteriorating rapidly at this late stage in the business cycle, and it is important to distinguish between haves and have-nots.
  • For investors looking for ways to upgrade quality in leveraged credit, loans present a good opportunity to move up the capital structure while still earning better spreads and yields than unsecured corporates. Nevertheless, investors should be aware of refinancing risk in BB loans and downgrade risk in single B loans.
  • We estimate that the high-yield corporate bond market offers a loss-adjusted spread of only 62 basis points compared to 274 basis points in bank loans.
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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.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited 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, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

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