Commodity Picture Is Still Improving

We continue to find value in energy and metals, which still offer yield premiums over non-commodity names despite an improving fundamental outlook.

December 15, 2016

This sector report is excerpted from the Fourth Quarter 2016 Fixed-Income Outlook.

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.

High-Yield Energy Prices Follow Oil Prices Higher Again

After two brief decoupling periods that saw high-yield energy bond prices trending sideways while oil prices struggled to maintain upward momentum, the OPEC announcement in mid-September that it would cut production boosted oil prices and allowed energy high-yield bonds to rally again.

High-Yield Energy Prices Follow Oil Prices Higher Again

Source: Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 10.14.2016.

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.

Yield Premiums Still Look Attractive in Commodity Sectors

While yields and spreads have compressed significantly following the strong summer rally, we continue to find value in energy and metals sectors where yields range from 7–9 percent, compared to average yields of 6 percent for ex-commodity companies.

Yield Premiums Still Look Attractive in Commodity Sectors

Source: Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 10.15.2016.

—Thomas Hauser, Managing 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. ©2016, 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.


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