Source: (T) BofAML, Credit Suisse. (L) Bloomberg. (R) JP Morgan.
We see the current environment of declining long-term rates and low corporate defaults as especially conducive for high yield bonds. During Q1, high yield bonds and leveraged loans rebounded along with equities, causing spreads to compress. Simultaneously, falling core Treasury yields boosted duration-sensitive investment grade bonds and other core fixed income. The path of interest rates has also helped dictate flows in the sector.
Core fixed income received a boost as rates fell 83 bps from November 8 through quarter-end. However, with the Barclays Agg now yielding just 2.93%, core fixed income is becoming more and more reliant on price appreciation – as opposed to income – to drive returns. While rates could possibly decline further as global growth slows and central banks halt monetary tightening, core fixed income has been beaten into a corner by rates.
Rates have also driven a reversal in leveraged credit flows, as a flattening yield curve has altered investor preference. As short-term rates have plateaued and even fallen, LIBOR-based floating rate loans have seen significant outflows. Meanwhile, falling long-term rates have made fixed-rate high yield bonds comparatively more attractive. With loan and high yield default rates near multiyear lows, at 1.00% and 0.94% respectively, the backdrop is still supportive for loans and bonds. We will be watching corporate debt levels, as well as signs of a business downturn that could cause spreads to widen.
Read the analysis for each indicator:
This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information. All investing is subject to risk, including the possible loss of the money you invest.