May 17, 2018
High-yield corporate bonds are trading at yields above 6 percent for the first time since December 2016, mostly due to the backup in benchmark Treasury rates. While five-year Treasury yields rose 61 basis points year to date through April, spreads are 26 basis points tighter, continuously retesting cycle lows as higher yields attract income seekers back into the market.
While five-year Treasury yields rose 61 basis points year to date through April, spreads are 26 basis points tighter, continuously retesting cycle lows as higher yields drive investor demand. Although we saw a pickup in volatility in the first quarter, we believe higher yields against a relatively benign credit backdrop will stem a mass exodus from the highyield market.
Source: ICE Bank of America Merrill Lynch, Guggenheim Investments. Data as of 4.24.2018.
Although we saw a pickup in volatility in the first quarter, we believe higher yields against a relatively benign credit backdrop will stem a mass exodus from the highyield market. The ICE Bank of America Merrill Lynch High-Yield index posted a 0.9 percent loss on a total return basis, as higher-duration BB-rated bonds delivered their worst performance since the third quarter of 2015 with a 1.7 percent loss, compared to a 0.4 percent loss for B-rated bonds and a 0.5 percent gain for CCC-rated bonds. Since 10-year Treasury yields began to move higher in early September 2017, BB-rated bonds have returned -0.8 percent, the only rating category in leveraged credit to record a loss over this period.
Between January and March, highyield mutual funds and exchangetraded funds experienced net outflows totaling $15.5 billion, but we expect a turnaround in demand. Funds saw a net inflow of $920 million in one week during April followed by the largest inflow in over a year of $3 billion.
Source: Lipper, Guggenheim Investments. Data as of 4.18.2018.
The selloff in Treasurys caused some trepidation among leveraged credit investors as higher-duration BBs experienced negative price returns. Between January and March, high-yield mutual funds and exchange-traded funds experienced net outflows totaling $15.5 billion, but we expect a turnaround in demand. Funds saw a net inflow of $920 million in one week during April followed by the largest inflow in over a year of $3 billion. We also note that primary dealer inventories of high-yield bonds have plunged, falling from approximately $5 billion at year-end 2017 to only $1 billion in mid-April, according to New York Federal Reserve Bank data. The last time dealer inventories fell to similar levels was in March 2016, when a swift pickup in demand caught dealers by surprise. To the extent investors are looking for opportunities in high yield as volatility levels off, we view B-rated credits relatively favorably in the current environment as they balance credit and duration risks and offer wider spreads compared to their own history than other rating categories.
—Thomas Hauser, Senior Managing Director; Rich de Wet, 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, 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.
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