Debt markets have been in a risk-on mode, fueled by expectations of additional Federal Reserve (Fed) rate cuts and a Trump presidency. The outcome of November’s presidential election produced perceived upside risks related to deregulation and tax cuts, while uncertainty stemming from proposed tariffs and their impact still remains. Even last week’s jobs report seemed to do little to lower expectations of a Fed rate cut in December.
As Greg Zappin highlighted in last week’s Chart of the Week, CCC credits have outperformed this year and the risk-on sentiment seemed to gain momentum during the third quarter. Following suit, issuance activity has increased, with more than $5 billion pricing across nine deals last week.1 This brings year-to-date (as of 12/6/24) supply to $284 billion, up +63% year-over-year versus the same period in 2023.2 With the capital markets open, issuers have taken advantage of the healthier demand for risk and, in turn, driven spreads tighter.
The high yield (HY) universe is now forecasted to grow in 2025, primarily driven by an increase in fallen angels, as well as an increase in net new issuance off historically low levels.3 It’s important to note that some of the expected fallen angels would become some of the largest issuers in the HY market, including Boeing and Celanese. These dynamics all seem to foster even tighter HY spreads in the medium term.
Key Takeaway
Lower quality HY risk has materially outperformed this year, and the risk-on momentum has only continued following the result of the presidential election and expectations of further Fed rate cuts. We have remained disciplined and selectively added risk, avoiding some of the larger liability management exercises. In my opinion, there is value in the lower quality range of high yield. While much of the space has rallied considerably this year, certain credits may still offer good relative value.
Sources:
1,2Barclays
3J.P. Morgan – U.S. High Yield and Leveraged Loan Credit Outlook; December 2024
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.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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