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MID-CYCLE CREDIT CHECK

High-yield bond valuations have cheapened in sympathy with equity market volatility but have shown relative resilience. Some signs of credit quality deterioration have emerged but remain at the fringes of the market and are not representative of corporate bonds overall. Corporate bond prices may have moved more than justified by fundamental data.

HIGH-YIELD OIL SLICK

The year-to-date performance advantage of high-yield bonds relative to Treasuries (based on the Barclays High Yield and Treasury indexes) has been reduced to a very narrow margin following rising oil-related default fears. We find current market-default expectations, which imply a 15% default rate over one year, overly pessimistic. Few bond maturities come due through the end of 2016, a key factor that will likely support a low-default environment for high-yield bonds overall.

SUMMER GROWTH CONCERNS

Fixed income markets showed signs of a growth scare in July 2015, with lower real yields, lower inflation expectations, and a flatter yield curve. The markets’ reaction may be a signal to the Fed that September 2015 is too early for an interest rate increase. Recent growth concerns may be creating opportunities.​

CHINA’S EFFECT ON EMERGING MARKETS DEBT

Emerging markets debt (EMD) spreads have moved above 4%, a level that has attracted buying interest in recent years. EMD is more sensitive to interest rates than the broad U.S. fixed income market. We continue to favor high-yield bonds due to their lower interest rate sensitivity.

PARSING PUERTO RICO

Puerto Rico’s debt crisis remains isolated and not symptomatic of the broad municipal bond market. Signs of contagion have not materialized and appear unlikely, although the probability of a default has increased. Puerto Rico bond prices largely reflect a default and are trading close to anticipated recovery values.

 
Results: 13 Articles found.
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