May 18, 2017
High-yield corporate bond spreads tightened in the first quarter of 2017, but not without some intermittent volatility. The sharp decline in crude oil prices during the first half of March led to price declines in the high-yield energy sector, highlighting the ongoing unease over the future of oil and gas producers. Non-energy sectors did not go unscathed. As the market-implied probability of a March Fed rate hike climbed from only 25 percent to over 80 percent over two weeks, spreads widened across the board, from gaming and media/telecom to retail and healthcare. Spreads have since recovered in the early part of the second quarter.
The sharp decline in West Texas Intermediate oil prices during the first half of March led to bond prices declining in the energy sector, highlighting the ongoing unease over the future of oil and gas producers.
Source: Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 4.15.2017.
The Credit Suisse High-Yield Index gained 2.3 percent in the first quarter, making it the fifth consecutive quarter of positive returns, albeit the weakest. High-yield corporate bond spreads tightened by 22 basis points quarter over quarter, ending March at 450 basis points. All rating categories delivered positive returns, and CCC-rated bonds continued to outperform BB-rated bonds and B-rated bonds.
Tight spreads continue to reflect an optimistic outlook on corporate earnings and the promise of pro-growth fiscal policies. While earnings are improving as expected, fiscal policy uncertainty is rising. As we mentioned last quarter, we are keeping an eye on the Chicago Board Options Exchange Volatility Index (VIX index), which measures implied equity market volatility. The VIX index has persisted at what our Macroeconomic and Investment Research Group believes to be unsustainably low levels. Meanwhile, our Global CIO expects that we could see some spikes in volatility this summer. Implied volatility levels tend to be closely correlated with corporate bond spreads. Should implied volatility rise this summer, we would also expect to see some spread widening as well. This temporary spike in volatility should not be mistaken for fundamental deterioration in the leveraged credit space, however, as we continue to expect that defaults will decline through the end of the year.
Should implied volatility rise this summer, we would expect to see some spread widening as well. However, this temporary spike in volatility should not be mistaken for a fundamental deterioration in the leveraged credit space. We continue to expect that defaults will decline through the end of the year.
—Thomas Hauser, Senior Managing Director; Rich de Wet, Director
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