/perspectives/sector-views/high-yield-corporate-bonds-limited-spread

High-Yield Corporate Bonds: Limited Spread Dispersion Creates Credit Picking Opportunities

Assets in the high-yield market trading at discounts to par have the potential for price appreciation as they approach maturities.

August 02, 2022


This High-Yield Corporate Bonds sector report is excerpted from the Third Quarter 2022 Fixed-Income Sector Views.

The combination of high inflation, the market pricing in the most aggressive Fed tightening path since the 1990s, Russia’s invasion of Ukraine, and continuous China COVID-related lockdowns led the high-yield corporate bond market to suffer a loss of 14 percent in the first half of 2022—the worst first half on record—of which 8.6 percentage points were driven by credit spreads widening relative to Treasurys.

No sector offered shelter from losses this year. Even those benefiting from high inflation, such as energy and materials, posted -3.9 and -3.8 percent excess returns, respectively. With index spreads at 550 basis points, we would normally expect the range of the tightest-to-widest industry spreads to be about 700 basis points. But that range sits at just 300 basis points as of July 14, with utilities offering the tightest spread of 367 basis points and telecom offering the widest at 667 basis points.

Limited industry dispersion relative to history has two possible explanations. First, unlike past experience when market stress was concentrated in a particular industry, such as in telecom during the late 1990s, financials and real estate in the 2000s, and energy in the last decade, markets expect similar stress across all industries in the next recession without any one industry being a focal point. Second, something is driving sellers to indiscriminately de-risk, whether this is due to the speed of fund redemptions or the inability to discern the industry winners from losers. If the latter is true, then some credits are already oversold, which we believe should yield strong future returns for credit pickers.

There have been few chances in recent history when 9 percent average yields have coincided with sufficient market liquidity for investors to take advantage of these levels. And although we expect the next six months to see more default and downgrade activity, spreads sitting around the 70th percentile of historical observations offer a nice cushion, but we are still cautious in our credit selection. Nonetheless, with most of the high-yield market trading at discounts to par, creditworthy bonds have the potential for price appreciation once they approach maturities.

Very Little Industry Dispersion in the High-Yield Index

Very Little Industry Dispersion in the High-Yield Index

Source: Guggenheim Investments, Bloomberg, ICE Index Services. Data as of 7.14.2022. Shaded areas represent recession.

—By Thomas Hauser and Maria Giraldo

 
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FEATURED PERSPECTIVES

August 02, 2022

Third Quarter 2022 Fixed-Income Sector Views

Relative value and performance drivers across fixed-income sectors.

June 30, 2022

Recession Signals Flashing Red

The latest data suggest that we may already be in a recession.

May 24, 2022

Despite the Gray Mood, Skies Are Only Partly Cloudy

The outlook for credit amid rising inflation, monetary tightening, and war in Europe.


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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 Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management. Securities offered through Guggenheim Funds Distributors, LLC.

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