/perspectives/sector-views/high-yield-corporate-bonds-cracks-are-forming
High-Yield Corporate Bonds: Cracks Are Forming
Investors should continue to limit exposure to CCCs despite recent cheapening because of the asymmetry of potential spread outcomes.
In recent years a decline in U.S. manufacturing activity has tended to coincide with widening high-yield credit spreads, but that has not been the case this year. High-yield spreads tightened 5 basis points over the third quarter of 2019 and as of Oct. 18 are 122 basis points tighter since the start of the year. Meanwhile, the U.S. manufacturing sector is in recession, with several consecutive months of ISM Manufacturing PMI prints below 50, but credit spreads remain tight at the index level.
Spreads Resist the Slowdown in Manufacturing Activity
The U.S. manufacturing sector is in recession, with several consecutive months of ISM Manufacturing PMI prints below 50, but credit spreads remain tight at the index level. Similar slumps in manufacturing activity have resulted in spread widening, but that has not been the case this year.
Source: Guggenheim Investments, Bloomberg, Bloomberg Barclays Indexes, Credit Suisse. Data as of 9.30.2019.
Similar slumps in manufacturing activity have resulted in spread widening, but that has not been the case this year. Nevertheless, spreads have widened for CCC-rated bonds, signaling rising concern about credit.
The ICE BofA Merrill Lynch High-Yield Constrained index delivered a return of 1.2 percent in the third quarter, bringing total returns to 11.5 percent year to date. The best year-to-date performance has come from BBs, with a total return of 13.0 percent, followed by single Bs with a return of 11.2 percent, and finally CCCs, trailing with a total return of 6.0 percent. For the quarter, CCCs lost 2.4 percent, while BBs and Bs held on to positive returns of 2.1 percent and 1.1 percent, respectively.
Averaging almost 1,000 basis points in the third quarter, CCC spreads appear to be on a path similar to late 2015, when spreads ultimately peaked at 2,000 basis points. Current CCC spreads might look appealing to those who do not foresee a repeat of 2015–2016, but our Macroeconomic and Investment Research Group believes the data show the economy is in a vulnerable place that could easily tip credit into another recession-like scenario. Weighing the upside potential of spreads tightening against the downside that they may widen another 1,000+ basis points, CCC spreads do not compensate investors for the risk. Instead, we continue to find value in BBs, and especially single Bs, which are not trading as much above par as BBs.
The Asymmetry of Potential Spread Outcomes Looks Unappealing
Weighing the upside potential of spreads tightening against the downside that they may widen another 1,000+ basis points, CCC spreads do not compensate investors for the risk.
Source: Guggenheim Investments, ICE Index Services. Data as of 10.18.2019. Shaded area represents recession.
—Thomas Hauser, Senior Managing Director; Rich de Wet, Director
Important Notices and Disclosures
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.
Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating rate senior secured syndicated bank loans and other floating rate securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk. 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.
©2019, Guggenheim Partners, LLC. 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.
VIDEOS AND PODCASTS
Scott Minerd, Chairman of Guggenheim Investments and Guggenheim Partners Global CIO joins Bloomberg TV on Fed Day to discuss the Fed’s 75 basis point hike, and signs that the economy is already in recession.
U.S. Economist Matt Bush discusses the fast-moving economic data, and Managing Director Aditya Agrawal reports on developments in the Agency MBS sector.
Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"). Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim.
Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.
Investing involves risk, including the possible loss of principal.
*Assets under management is as of 06.30.2022 and includes leverage of $18.3bn. 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 Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.
This is not an offer to sell nor a solicitation of an offer to buy the securities herein. GCIF 2019 and GCIF 2016 T are closed for new investments.
©
Guggenheim Investments. All rights reserved.
Research our firm with FINRA Broker Check.
• Not FDIC Insured • No Bank Guarantee • May Lose Value
This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.
By choosing an option below, the next time you return to the site, your home page will automatically
be set to this site. You can change your preference at any time.
We have saved your site preference as
Institutional Investors. To change this, update your
preferences.
United States Important Legal Information
By confirming below that you are an Institutional Investor, you will gain access to information on this website (the “Website”) that is intended exclusively for Institutional Investors and, as such, the information should not be relied upon by individual investors. This Website and any product, content, information, tools or services provided or available through the Website (collectively, the “Services”) are provided to Institutional Investors for informational purposes only and do not constitute a recommendation to buy or sell any security or fund interest. Nothing on the Website shall be considered a solicitation for the offering of any investment product or service to any person in any jurisdiction where such solicitation or offering may not lawfully be made. By accessing this Website, you expressly acknowledge and agree that the Website and the Services provided on or through the Website are provided on an as is/as available basis, and except as partnered by law, neither Guggenheim Investments and it parents, subsidiaries and affiliates nor any third party has any responsibility to maintain the website or the Services offered on or through the Website or to supply corrections or updates for the same. You understand that the information provided on this Website is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. You also agree that the terms provided herein with respect to the access and use of the Website are supplemental to and shall not void or modify the Terms of Use in effect for the Website. The information on this Website is solely intended for use by Institutional Investors as defined below: banks, savings and loan associations, insurance companies, and registered investment companies; registered investment advisers; individual investors and other entities with total assets of at least $50 million; governmental entities; employee benefit (retirement) plans, or multiple employee benefit plans offered to employees of the same employer, that in the aggregate have at least 100 participants, but does not include any participant of such plans; member firms or registered person of such a member; or person(s) acting solely on behalf of any such Institutional Investor.
By clicking the "I confirm" information link the user agrees that: “I have read the terms detailed and confirm that I am an Institutional Investor and that I wish to proceed.”