March 17, 2016
A perfect storm of market events caused investment-grade corporate credit spreads to widen in 2015. A weakening outlook for global growth, and a heavy supply-demand imbalance in commodities markets drove selling in the energy and basic materials industries. A strengthening dollar negatively affected earnings growth for some of the largest multinational companies, and the Fed’s decision to delay raising interest rates until December spurred selling across financials. In addition, supply weighed on the market as banks issued over $300 billion of debt to bolster capital ratios. Total investment-grade bond issuance set a new record in 2015 with $1.2 trillion in gross supply.
U.S. investment-grade bond issuance set a new record with approximately $1.2 trillion of gross supply in 2015. Heavy supply in the second half of the year was one of the main factors contributing to wider spreads. Yields, however, were range-bound between 4–4.5 percent between July and December as Treasury yields declined.
Source: JP Morgan. Data as of 12.31.2015.
As a result of this tumult, spreads in 2015 widened by 35 basis points to 165 basis points based on the Barclays U.S. Corporate Investment Grade Index, which posted a loss of 0.7 percent for the year. While investment-grade bonds offered average yields of 3.7 percent in 2015, the highest since the taper tantrum in 2013, over 350 investment-grade credits expected to join the high-yield market (at a par value of nearly $240 billion) traded at 6.4 percent yield by year end, equivalent to a BBcredit yield.
The spread widening suggests that the market is pricing in deteriorating credit fundamentals and future downgrades. While this may be true for certain issuers, we believe the spread widening in 2015 has created an opportunity to lock in higher yields on issues where we maintain strong credit convictions. Such opportunities to add yield have grown in the investment-grade market over the past several months, with 43 percent of the market offering yields of 4 percent or more, up from 18 percent at the beginning of 2015. We expect further volatility in energy, and are waiting for weaker hands to exit, but we like financials, as stricter capital adequacy requirements have forced banks to strengthen balance sheets, thereby easing credit risk. We also find mature companies in the technology sector attractive because of their cash-heavy balance sheets.
Tumbling prices create opportunities to lock in higher yields on bonds where we maintain strong credit convictions. Such opportunities to add yield have grown in the investment-grade market over the past several months, with 43 percent of the market offering yields of 4 percent or more, up from 18 percent at the beginning of 2015.
Source: Bank of America Merrill Lynch, Guggenheim. Data as of 12.31.2015.
—Jeffrey Carefoot, CFA, Managing Director; Justin Takata, 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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