Fixed-Income Sector Report - High Yield and Bank Loan Outlook

Fundamental factors underlying the corporate sector continue to underscore our constructive stance on leveraged credit, however, investors should prepare for heightened Q4 volatility amid shifting technical dynamics in the bank loan market.

REPORT HIGHLIGHTS:

  • The U.S. Federal Reserve (Fed) on September 18 announced it would not taper quantitative easing (QE) and reiterated that asset purchases are not on a preset course. This announcement is likely to keep volatility elevated as investors continue to speculate on when tapering might begin.
  • Buoyed by $17 billion of inflows in the third quarter, bank loans rose by 1.5 percent. Amid inflows of $7.9 billion, the high yield sector posted a third quarter return of 2.4 percent, rebounding from over $10 billion of outflows and a negative return of 1.4 percent in the second quarter.
  • Recent regulatory changes have caused CLO liability costs to rise by 25 basis points since April 2013. Over the same period, loan spreads tightened by 80 basis points, causing CLO asset-liability spreads to narrow. This reduced arbitrage has led to a slowdown in new CLO origination.
  • Since 2008, the retail share of the loan market has grown to 24 percent from 3 percent. The decline in CLO activity may cause the primary loan market to become increasingly dependent on retail demand, a technical dynamic that may induce greater volatility in bank loans.

DOWNLOAD THE FULL REPORT (PDF) >

© Guggenheim Partners

http://guggenheimpartners.com

Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy or, nor liability for, decisions based on such information. This article is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product or as an offer of solicitation with respect to the purchase or sale of any investment. This article should not be considered research nor is the article intended to provide a sufficient basis on which to make an investment decision. The article contains opinions of the author but not necessarily those of Guggenheim Partners, LLC its subsidiaries or its affiliates. The author’s opinions 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 is not guaranteed as to accuracy. This article may be provided to certain investors by FINRA licensed broker-dealers affiliated with Guggenheim Partners. Such broker-dealers may have positions in financial instruments mentioned in the article, may have acquired such positions at prices no longer available, and may make recommendations different from or adverse to the interests of the recipient. The value of any financial instruments or markets mentioned in the article can fall as well as rise. Securities mentioned are for illustrative purposes only and are neither a recommendation nor an endorsement. Individuals and institutions outside of the United States are subject to securities and tax regulations within their applicable jurisdictions and should consult with their advisors as appropriate. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. © 2013, Guggenheim Partners, LLC.

© Guggenheim Investments

Read more commentaries by Guggenheim Investments