August 17, 2016
The tally of U.S. dollar-denominated commodity-related corporate defaults between January and June reached 75 individual companies, totaling $127 billion in total volume, according to Bloomberg. Defaults are unlikely to cease completely in the second half of 2016, but we believe they will slow, ending the upward trajectory for the high-yield 12-month trailing default rate. Declining high-yield default expectations are reflected in recent valuations, as weighted-average yields fell to 7.1 percent at quarter-end from a peak of 10.4 percent in February, and spreads tightened by 325 basis points. In the energy sector, average high-yield bond prices have bounced back from the lows of 49 percent of par in February to 77 percent in June, but there are still plenty of credits trading at less than 40 percent of par. This suggests to us that expected defaults for the remainder of 2016 are already priced into the market.
As oil and other commodity prices rebounded from February lows, commodity sector spreads compressed from over 1,000 basis points. As a result, the 5.9 percent quarterly gain in the high-yield corporate bond market was largely due to the 12.1 percent total return for commodity sectors in the second quarter. While all sectors have room for further spread compression, energy and basic materials continue to present the most total return upside potential.
Source: Credit Suisse, Guggenheim Investments. Data as of 6.30.2016.
Largely driven by the rebound in commodity sectors, high-yield corporate bonds turned in an impressive second quarter, returning 5.9 percent, their best quarterly performance since first quarter 2012. Brexit-related concerns briefly weighed on the market, but the weakness was primarily a spillover effect from the United Kingdom and Europe. U.S. high-yield bonds ultimately regained their footing with spreads tightening by 80 basis points over the quarter, ending June at 674 basis points. All rating categories delivered positive returns, with BBrated bonds, B-rated bonds, and CCC-rated bonds returns totaling 3.2 percent, 4.2 percent and 12.6 percent, respectively. Energy was once again the best performing sector in the quarter—its 20.4 percent total return was the best threemonth return on record, based on Credit Suisse data.
Sector spreads in the high-yield market show that all sectors have room for further spread compression, but energy and basic materials present the most total return upside for skilled credit pickers. We see value in these sectors in particular, and also continue to find attractive opportunities in technology and media. Monitoring defaults and recoveries, and adjusting portfolio allocations accordingly, remains critical at this point in the credit cycle.
Energy was the best-performing sector in the second quarter, posting a best-ever quarterly total return of 20.4 percent. High-yield corporate bond spreads tightened by 80 basis points to end June at 674 basis points, which continues to look attractive based on the historical ex-recession average of 525 basis points.
—Thomas Hauser, Managing Director
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, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.
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