/perspectives/sector-views/high-yield-corporate-bonds-credit-pickers-market

High-Yield Corporate Bonds: A Credit Picker’s Market

Technical dynamics weigh on high-yield rallies despite improving fundamentals.

August 23, 2018


This High-Yield Corporate Bonds sector report is excerpted from the Third Quarter 2018 Fixed-Income Outlook.

The high-yield market continues to experience bouts of volatility, despite a positive fundamental backdrop, on the back of concerns over the trade war the U.S. has initiated against its trading partners. The increasingly hostile trade rhetoric has created uncertainty over future economic growth, and markets have priced this in. Spreads have been range-bound since December 2017, though yields continue to rise.

Spreads ended the second quarter one basis point tighter from their level on March 30, with bonds delivering a 1.0 percent total return, as measured by the ICE Bank of America Merrill Lynch Constrained High-Yield index. Higher-duration BB-rated bonds continue to trail returns in lower-quality bonds with a 0.1 percent loss in the second quarter, compared to a 1.4 percent gain for B-rated bonds and a 2.6 percent gain for CCC-rated bonds.

Looking at fundamentals, positive earnings growth among high-yield corporate bond issuers has brought leverage multiples back inside 5x earnings, ending at 4.3x earnings as of the end of first quarter 2018. Interest coverage has also improved to 3.7x earnings, up from 2.0x earnings in 2016, the highest since 2014. Given these factors, the weakness in high yield is clearly not being driven by market fundamentals. In this type of environment, passive strategies may underperform as investors sell the most liquid names first. Indeed, non-exchange-traded fund (ETF) eligible bonds have been outperforming ETF-eligible bonds this year, according to Credit Suisse. There is a 1 percentage point gap in year-to-date returns between ETF- versus non-ETF-eligible names, highlighting a technical dynamic that is weighing on returns, and this difference is even more pronounced in lower-quality credit, where non-ETF-eligible CCC-rated corporate bonds have returned 2.7 percent more this year than ETF-eligible CCCs. We believe this dynamic highlights the value-add from active management because it is crucial to be more selective on corporate credit. We continue to view B-rated credits favorably in the current environment relative to other credit tranches because they have a better balance of credit and duration risks and continue to offer wider spreads compared to their own history than those of other rating categories.

High-Yield Rallies Lacked Stamina in the Second Quarter

Despite a positive fundamental backdrop, the high-yield market continues to experience bouts of volatility on the back of concerns over the trade war the U.S. has initiated against its trading partners.

High-Yield Rallies Lacked Stamina in the Second Quarter

Source: ICE Bank of America Merrill Lynch, Guggenheim Investments. Data as of 6.30.2018.

High-Yield Spreads Have Been Range-Bound for Months

Increasingly hostile trade rhetoric has created uncertainty over future economic growth, and markets have priced this in. Spreads have been range-bound since December 2017, though yields continue to rise.

High-Yield Spreads Have Been Range-Bound for Months

Source: ICE Bank of America Merrill Lynch, Guggenheim Investments. Data as of 6.30.2018.

—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, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management. ©2018, 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.


FEATURED PERSPECTIVES

December 12, 2019

The Transition Away from Libor

Much Progress, More Wood to Chop

November 08, 2019

The Science and Art of Risk Management: Liquidity Risk

Good risk management leads to good decision making.

November 04, 2019

The Risk Mitigation Advantage in Active Fixed-Income Management

Why active has the potential to outperform passive in fixed income.


VIDEO

Third Quarter 2019 Fixed-Income Outlook 

Third Quarter 2019 Fixed-Income Outlook

Portfolio Manager Adam Bloch and Matt Bush, a Director in the Macroeconomic and Investment Research Group, share insights from the third quarter 2019 Fixed-Income Outlook.

Core Fixed-Income Conundrum 

Solving the Core Conundrum

Anne Walsh, Chief Investment Officer for Fixed Income, shares insights on the fixed-income market and explains the Guggenheim approach to solving the Core Conundrum.







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.

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. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© 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.