Crude oil continues to lick its wounds which started in June of last year. Analysts are expecting continued pain in the oil and gas sector, and the metals and mining sector has joined the ranks of distressed sectors. A popular high-yield corporate bond ETF – the iShares iBoxx HYG ETF (HYG) – has seen a somewhat steady decline since the June 2014 inception of the slide in crude oil, with the exception of a temporary recovery starting in mid-December 2014. Leveraged loan prices, as measured by the S&P/LSTA Leveraged Loan Index, started sliding with oil as well, but hit resistance at the 95 price level in mid-December 2014. This resistance level for leveraged loans was tested and held for a second time last week. While HYG has now managed to break through its resistance price level of 87 back in mid-December 2014, we have reason to believe leveraged loans should fare better if the weakness in commodity prices continues.
An analysis of the constituents of HYG yields an exposure of 16.3% on a market value basis to the oil and gas and metals and mining sectors. The HYG exposure is outsized compared to the leveraged loan universe average combined exposure of 5.90% (3.55% oil and gas and 2.35% metals and mining). The notable difference in idiosyncratic risk between leveraged loans and high-yield corporate bonds has been recognized by the market and is reflected in the decoupling of the leveraged loan index from HYG starting in February, as can be seen in this week’s chart.
Key Takeaway: As the higher exposure to idiosyncratic risk continues to weigh down on HYG, leveraged loans could be poised for a rebound and demonstrate stronger resilience due to better sector diversification. This resilience in leveraged loans is a positive for the leveraged loan and collateralized loan obligation (CLO) markets and will continue to contain the fallout associated with the oil and gas and metals and mining sectors.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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