/perspectives/sector-views/high-yield-and-bank-loan-outlook-july-2019

High-Yield Credit in a Fed Easing Cycle

High-yield corporate bond spreads and bank loan discount margins typically widen when the Fed is lowering interest rates.

July 17, 2019


High-Yield and Bank Loan Outlook Report

Third Quarter 2019

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

  • Investors may be tempted to go down in quality in anticipation of a Fed-induced rally in leveraged credit. History suggests this would be ill-advised.
  • On average since 1986, high-yield corporate bond spreads and bank loan discount margins widened by 131 basis points and 294 basis points during Fed easing periods, respectively.
  • Some market participants draw comparisons between today and the experience in 1998, when the Fed successfully extended the economic cycle. We argue that this comparison warrants some caveats as it relates to credit, since the mini-easing cycle in 1998 was followed by several years of above-average default rates.
  • Even if the Fed eases rates aggressively, our base case is that at year-end, high-yield corporate bond spreads and bank loan discount margins will be wider than where they ended the first half of 2019.
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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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