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Guggenheim Fourth Quarter 2020 High-Yield and Bank Loan Outlook: Opportunities in Credit Amid Challenging Conditions

Guggenheim Investments
·4 min read

With the economy gradually improving and monetary policy anchoring Treasury rates to low levels, we remain constructive on below investment-grade opportunities in bonds and loans. Credit spreads still have room to tighten, but default risk remains elevated in certain sectors.

NEW YORK, Nov. 06, 2020 (GLOBE NEWSWIRE) -- Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Fourth Quarter 2020 High-Yield and Bank Loan Outlook. Titled “Opportunities in Credit Amid Challenging Conditions,” the report explains that while credit spreads have plenty of room to tighten, there is an overhang of a challenging credit environment as measured by market default rates, rating migration, and fundamentals.

Among the highlights in the 16-page report:

  • Central bank action has played a critical role in supporting credit availability, which has tempered forward looking default rate expectations. However, we expect some sectors, namely energy and retail, will continue to experience defaults going forward.

  • Avoiding those defaults is crucial, because investors recover an average of only 40 and 70 percent of par in high-yield and bank loan default situations, respectively, and year-to-date recoveries have been significantly lower than those averages.

  • Credit spreads remain near the 60th percentile of historical observations dating back to 1998, giving them plenty of room to tighten.

  • The aggregate 12-month trailing high-yield net leverage ratio of 4.5x has already exceeded the 2008–2009 default cycle peak of 3.9x, and is likely to get worse as 2019 data falls out of the calculation.

  • We have selectively added high-yield exposure in longer maturity bonds this year, including in fallen angels.

  • Our research shows fallen angel prices tend to rebound after they enter the high-yield index, supporting the existence of a structural anomaly that causes them to be oversold around the index transition period to spreads that are wider than is justified by fundamentals.

  • All indications point to continued improvement in below-investment-grade bonds. Any setback should be viewed as temporary and, as such, an opportunity to add to positions.

For more information, please visit http://www.guggenheiminvestments.com.

About Guggenheim Investments

Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $233 billion1 in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.

1. Guggenheim Investments assets under management as of 9.30.2020 and include leverage of $14bn. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, and Guggenheim Partners India Management.

Investing involves risk, including the possible loss of principal. The potential impacts of the COVID-19 outbreak are increasingly uncertain, difficult to assess and impossible to predict, and may result in significant losses. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their value to decline. High-yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.

One basis point is equal to 0.01 percent.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

Media Contact
Gerard Carney
Guggenheim Partners
310.871.9208
Gerard.Carney@guggenheimpartners.com