They are expecting energy related defaults to increase to 10%. However, excluding energy, they are expecting default rates to be 1.5%, about half of the historical average of 3.8%.

Just as we saw contagion from energy weakness translate to general high yield market aversion in Q4 2014, we are seeing the same again today.  However, just because there are apprehensions about the energy sector, it doesn’t mean the entire high yield market should be abandoned.  We believe that should there be a spike in defaults, they will largely be contained to the energy industry and see the fact that much of the rest of the market is currently being brought down along with it as an opportunity to purchase these non-energy companies at attractive prices.  We continue to caution investors that are exposed to the broad indexes/index-based products that have higher exposure to the energy sector and are not building portfolios based on fundamentals to do some work to better understand what they own.  However for active managers who focus on credit selection and fundamentals, we see the current environment as ripe for the picking.

1 The energy industry is 16.29% of the J.P. Morgan U.S. High-Yield Index.  Acciavatti, Peter, Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li.  “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, July 24, 2015, p. 59.

2 Acciavatti, Peter Tony Linares, Nelson R. Jantzen, CFA, Rahul Sharma, and Chuanxin Li.  “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield Research, April 10, 2015, p. 4-5.

Although information and analysis contained herein has been obtained from sources Peritus I Asset Management, LLC believes to be reliable, its accuracy and completeness cannot be guaranteed. Information on this website is for informational purposes only. As with all investments, investing in high yield corporate bonds and loans and other fixed income, equity, and fund securities involves various risk and uncertainties, as well as the potential for loss. Past performance is not an indication or guarantee of future results.

This article was written by Heather Rupp, CFA, Director of Research for Peritus Asset Management, the sub-advisory firm of the AdvisorShares Peritus High Yield ETF (HYLD).