Several factors suggest that the next default cycle could be more idiosyncratic and credit-specific, spanning multiple sectors
NEW YORK, Nov. 21, 2022 (GLOBE NEWSWIRE) — Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today released its outlook for high yield and bank lending for the fourth quarter of 2022. Titled “Strong Credit Market Shapes Default Outlook,” the report examines the ways in which the coming U.S. recession increases the likelihood of increased defaults in credit markets.
Among the highlights of the 16-page report:
The stress of this cycle is fueled by ruthlessly high interest rates, unlike previous cycles triggered by a specific sector shock.
The default rate is expected to reach 3-3.5% by the end of 2023 in the high yield and bank lending sectors in the United States, but it will continue to increase thereafter, as a likely longer recession that the average will ensue.
Our biggest concern when looking at the credit outlook is the possible lack of a typical monetary and fiscal policy response that occurs when the U.S. economy experiences a recession, due to fears of reigniting above-average inflation. ‘objective.
Despite growing headwinds for the economy, we remain encouraged by the financial results we are seeing across much of the credit market. Debt issuers are entering this downturn in good financial health, with strong balance sheets and historically strong earnings.
Given the strength of credit fundamentals, we believe discounted bond yields and prices offer the most attractive opportunity for portfolios in over a decade.
After the recent rally, yields and spreads remain close to the most attractive levels in the last decade, and we believe that the risk premiums of higher quality high yield securities offset the risk of default over the next 24 months.
Investors should be aware of the downside risks that remain as the economy absorbs the full extent of the policy tightening.
For more information, please visit http://www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with over $218 billion1 of total assets in bond, equity and alternative strategies. We focus on the return and risk needs of insurance companies, private and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers and high net worth investors. Our more than 250 investment professionals conduct rigorous research to understand market trends and identify undervalued opportunities in often complex and under-tracked areas. This approach to investment management has enabled us to offer innovative strategies offering opportunities for diversification and attractive long-term results.
1. Guggenheim Investments assets under management are as of 09/30/2022 and include leverage of $17 billion. Guggenheim Investments represents the following investment management affiliates of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC and Guggenheim Partners India Management.
Investing involves risk, including possible loss of principal. Investments in fixed income instruments are subject to the possibility that interest rates will rise causing their value to decline. High yield and unrated debt securities have a higher risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including mortgage-backed securities and loan-backed obligations (“CLOs”), generally receive payments consisting partly of interest and partly of repayment of principal. These payments may vary depending on the repayment rate of the loans. Certain asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear risks similar to direct investment in loans, such as credit, interest rate, counterparty, prepayment, liquidity and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or variable interest rate.
This material is distributed or presented for informational or educational purposes only and should not be construed as a recommendation of any particular security, strategy or investment product, or as advice to investment of any kind. This material is not provided on a fiduciary basis, may not be relied upon for or in connection with making investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The contents herein are not intended to be and should not be construed as legal or tax advice and/or legal advice. Always consult a financial, tax and/or legal professional regarding your particular situation.
This material contains the opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its affiliates. The opinions contained in this document are subject to change without notice. Forward-looking statements, estimates and certain information contained herein are based on proprietary and non-proprietary research and other sources. The information contained herein was obtained from sources believed to be reliable, but its accuracy is not guaranteed. Past performance does not represent future results. There is no representation or warranty as to the current accuracy of decisions based on this information, nor any liability for it. No part of this material may be reproduced or referred to in any form without the express written permission of Guggenheim Partners, LLC.