Standard & Poor’s 12-month trailing high-yield default rate reached 5 percent as of Sept. 30, the highest since July 2010. Energy and metals companies continue to represent the largest share of defaults, but we also saw a few defaults in financials, retail, and media. OPEC’s announcement that it will be looking to contain production to within a tight range boosted oil prices in September, and also caused energy spreads to tighten. Further easing of borrowing conditions in the energy sector should avert some defaults over the next six to 12 months, potentially lowering the headline default rate back down to the belowaverage trend. Excluding commodity names, the trailing 12-month default rate is only 2.4 percent as of Sept. 30, below the historical average of 4.3 percent.
The Credit Suisse High Yield Index gained 5.7 percent in the third quarter, making it the third consecutive quarter of positive returns. High-yield bond spreads tightened 107 basis points quarter over quarter to 567 basis points. All rating categories delivered positive returns and lower quality continues to outperform, with BB-rated bonds returning 4.3 percent while B-rated bonds and CCC-rated bond returned 4.9 percent and 8.3 percent, respectively. For the year, high-yield corporate bonds have been one of the best performing fixed-income asset classes, delivering 15.5 percent total return year to date.
Long-term concerns continue to underscore fundamentals. The most recently reported high-yield leverage multiples set a new record, casting doubt over the sector’s ability to sustain such high debt levels through the next downturn. Our Macroeconomic Research team believes there is still two to three years of runway left before the U.S. economy contracts, but given that the average highyield bond maturity is approximately six years, we remain highly selective in our approach. We continue to find value in materials and energy where weaker names have exited and the fundamental outlook is still improving. Investors can obtain yields ranging from 7–9 percent in energy and metals, compared to non-commodity yields averaging only 6 percent.
This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.
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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, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim").
Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
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Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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