April 2017
High-Yield and Bank Loan Outlook Tight Spreads Call for Caution Investment Professionals
The faith-based rally that kicked off 2017 lost steam in March as investors’
Scott Minerd
expectations for fiscal easing were marked to market. As “Trump trades” continue
Chairman of Investments and Global Chief Investment Officer
to unwind, and the Federal Reserve (Fed) raises rates further to contend with a
Jeffrey B. Abrams Senior Managing Director, Portfolio Manager Kevin H. Gundersen, CFA Senior Managing Director, Portfolio Manager
tightening labor market, we expect to see investors take more chips off the table unless we see more concrete legislative progress on fiscal policy in Washington. Given that high-yield bonds spreads have been tighter only 34 percent of the time since 1986, the sector appears vulnerable to spread-widening. Bank loans continue to look more attractive than high-yield corporate bonds, offering 50 basis points higher yields when measured to maturity. However, yield-to-maturity measures can be misleading in periods of high refinancing volumes, as refis reduce issuers’ borrowing costs at the expense of investors’
Thomas J. Hauser
spread income. In this report, we discuss our approach to adjusting yield
Managing Director, Portfolio Manager
expectations and managing risk amid elevated loan refinancings.
Maria M. Giraldo, CFA Director, Investment Research
Report Highlights § The primary market is witnessing a strong resurgence, but refinancing makes
up the lion’s share of activity. Combining high-yield corporate bond and institutional leveraged loan issuance, refinancing volume represented 52 percent and 66 percent of total new issue activity in 2016 and the first quarter of 2017, respectively, compared to the 10-year average of 43 percent. § Borrowers shaved roughly 90 basis points from contractual spreads through
refinancing transactions in the first quarter, effectively lowering investors’ spread income. This is something investors should factor into yield expectations going forward. § Even with adjusted return expectations, bank loans look more attractive than
high-yield corporate bonds due to their higher position in the capital structure, their floating coupons, and their lower spread durations.
Guggenheim Investments
High-Yield and Bank Loan Outlook | Second Quarter 2017
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