Looking at Yields in High-Yield Credit

High-Yield and Bank Loan Outlook

Third Quarter 2021

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:

  • Our credit spread dashboard shows that secondary loan discount margins are cheap relative to corporate bond spreads, which is explained by differences in benchmark rates as well as higher call risk in loans.
  • Call risk significantly limits near-term upside potential. Investors can look to the primary market where call protection is longest and find that loan yields look comparable to corporate bond yields in the BB-rated and B-rated groups.
  • We expect average annual credit loss rates of 110 basis points in high-yield corporates over the next three to five years, below a historical average of 261 basis points. In loans, we estimate an average annual credit loss rate of 86 basis points, which is lower than corporates due to a higher recovery rate.
  • Our forward-looking credit loss rate estimates result in positive loss-adjusted credit yields for most credit segments, but reveal little cushion in CCC-rated corporates.
  • A focus on BB-rated and B-rated cohorts is prudent given record low yields and could help limit portfolio volatility if a correction materializes.