July 2016
High-Yield and Bank Loan Outlook Focus on Recovery Rates as Credit Risk Rises Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer
The rally in risk assets that began in February 2016 was interrupted in June by the United Kingdom’s vote to leave the European Union. Despite the selloff following the U.K. vote, high-yield bonds and bank loans still turned in impressive quarterly returns of 5.9 percent and 2.9 percent, respectively, bringing year-to-date returns to 9.3 percent and 4.2 percent. Current valuations in energy bonds indicate that
Jeffrey B. Abrams
leveraged credit has further room to rally as we pass the worst of the commodity-
Senior Managing Director,
related distress, but we continue to expect volatility will remain elevated until
Portfolio Manager Kevin H. Gundersen, CFA Senior Managing Director, Portfolio Manager Thomas J. Hauser Managing Director, Portfolio Manager
the fourth quarter. Recent default experience, characterized by lower-than-average recovery rates in leveraged credit, may serve as a preview of the next default cycle. Our research suggests that high-yield bond recoveries should improve, but loan recoveries will remain depressed in light of weaker covenants and poor debt subordination. In this report, we review these trends and discuss our outlook for recoveries for high-yield bonds and bank loans.
Report Highlights
Maria M. Giraldo, CFA
The Credit Suisse High-Yield Bond and Leveraged Loan indexes posted gains
Vice President,
of 5.9 percent and 2.9 percent in the second quarter, their best quarterly
Investment Research
performance since the first and third quarters of 2012, respectively. With global monetary policy growing more accommodative, foreign flows into the U.S. should have the effect of another round of quantitative easing to U.S. financial markets. Assets offering higher yields than U.S. Treasurys will continue to benefit from the persistent low-rate environment. As yields fall, investors should more frequently evaluate loss and default assumptions. Our research suggests that high-yield bond recoveries should improve from the lower-than-average trend in 2015–2016 given the presence of more secured bonds in the market compared to the pre-crisis period. We expect leveraged loan recoveries will be lower in the next default cycle, but yields continue to compensate for credit risk.
Guggenheim Investments
High-Yield and Bank Loan Outlook | Q3 2016
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