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

Reaching the End of the Runway

While the U.S. speculative-grade default rate could reach 15 percent in this cycle, the market is offering better entry points than seen in years.

May 20, 2020


High-Yield and Bank Loan Outlook

Second Quarter 2020

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

  • High-yield bonds and bank loan markets are pricing in the damaging effects of the ongoing recession. Spreads widened to levels in March last seen in 2009, though both sectors could see more losses if spreads widen to 2008 peaks.
  • The high-yield corporate bond and bank loan markets both entered this downturn with weak earnings growth and a higher leverage ratio than in 2008. Tying together our economic and top-down credit views, we expect the U.S. speculative-grade default rate will reach 15 percent in this cycle; higher than the peaks in the 1990, 2002, and 2009 recessions.
  • A lot of downside is reflected in current price and spread levels, but more pain may come as economic data and corporate earnings reveal the extent of the damage COVID-19 has inflicted on the economy.
  • Credit investors should be prepared for the worst-case scenario and use the recent reprieve brought on by a flood of stimulus programs to sell weak credits and buy likely survivors. The current market offers the opportunity to look for quality investments at better entry points than we have seen in years.
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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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