We are six years into the current economic cycle, but don’t expect that we are hitting the trough in the near term. As we look at the high yield market, we see it as significantly better positioned than we saw heading into 2008, as we haven’t seen massive LBOs and over-levering leading up to this point, we view the problem area in the high yield market—energy—as pretty well contained to those companies and not causing widespread fundamental issues into other industries, and spreads are at what we see as a very reasonable and attractive valuation currently, meaning our market is not near any sort of “bubble” level.
As J.P. Morgan recently noted in one of their reports, “…the broader fundamental outlook remains robust and we continue to expect the credit cycle to last at least a few years and maybe longer. We do believe concerns around oil, the Fed, and China will weigh less heavily with the passage of time, which should clear the way for a partial reversion.”3 We agree and believe that with the currently attractive yield and income generation to be had in the high yield market and potential for spread compression, this market is positioned well. While we don’t expect to see a recession, even if we were to get a mild one on the back of these global concerns, we may well have already seen the return hit to the high yield market as history has shown that to be a leading indicator.
1 Credit Suisse High Yield Index data from Credit Suisse. The Credit Suisse High Yield Index is designed to mirror the investible universe of the $US-denominated high yield debt market. S&P 500 numbers based on total returns.
2 Credit Suisse High Yield Index data from Credit Suisse. Based on month-end pricing/returns for the 6 month period 2/28/15 to 8/31/15 and 3 month period 5/31/15 to 8/31/15.
3 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Credit Strategy Weekly Update,” J.P. Morgan North American High Yield and Leveraged Loan Research, September 18, 2015, p. 4.