Outlook on high-yield and loan markets Outlook on high-yield and loan markets http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\video\cranes-buildings-small.jpg January 4 2022 December 29 2021

Outlook on high-yield and loan markets

We’re constructive based on several factors.

Published December 29 2021
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Video Transcript
00:03
Steve Wagner: Steve Wagner, I'm a Senior Portfolio Manager and Senior Analyst at Federated Hermes.
00:08
Interviewer: What's your outlook for the high yield and loan markets through the end of 2021 and into 2022?
00:15
Steve Wagner: We continue to be constructive on both high yield and loans. Let's take a look at high yield first. Number one, the economy remains in very good shape, that's a great backdrop for credit risk in high yield bonds. Number two, the fundamentals of the credit markets are extremely strong. So coming out of COVID downdraft in 2020, we've seen companies have held up very well in the leveraged finance markets, including the high yield market and when defaults peaked at the end of 2020 in the market, they peaked at a little over 4%, which came in much lower than most people believed would be the case and since then default rates have been coming down pretty dramatically and are running well below 1% at this point, which is well below historical averages in the high yield markets.
01:05
Steve Wagner: We think that the credit backdrop is very positive for high yield. Another factor that we take a look at is overall rate in agency upgrades and downgrades. So this is whether Moody's or S&P upgrades or downgrades of corporate credit rating. The upgrades are outpacing downgrades by a wide margin right now so we continue to see that as a positive indicator for the market. We believe that overall default rates will continue to be very low into 2022. With that said, the last piece is valuation, and this is the piece that gives us a little bit of pause. In the high yield market we've been churning in a valuation range, a little bit inside of 400 basis points, which is well inside of a longterm average. But with that said, given the fact that we are in such a strong credit environment, and a decent economic environment, we believe that that valuation is warranted. So we continue to see returns in the low to mid single digits in the high yield market that kind of potential.
02:12
Steve Wagner: Now for the loan market, all of the other factors remain the same so very strong credit fundamentals, the economic outlook is very strong, we also see a little bit more value in the spreads in the loan market right now so, for the balance of this year, we've seen spreads sort of inside all over 450 basis points, which is a lot closer to a longterm average in the low market. So, credit conditions continue to be very strong, default rates similar to high yield, are running well below 1% in the loan market and we think that'll continue to be the case in 2022.
02:50
Views are as of Nov. 16, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment grade securities. In addition to the risks generally associated with debt instruments, such as credit, market, interest rate, liquidity and derivatives risks, bank loans are also subject to the risk that the value of the collateral securing a loan may decline, be insufficient to meet the obligations of the borrower or be difficult to liquidate. Moody's assigns ratings on the basis of assessed risk and the borrower's ability to make interest payments, and its ratings are closely watched by many investors. The S&P 500 Index, or Standard & Poor's 500 Index, is a market-capitalization-weighted-index of 500 leading publicly traded companies in the U.S. Federated Investment Management Company 21-40582 (12/21)
Tags 2022 Outlook . Fixed Income . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.  In addition, fixed income investors should be aware of other risks such as credit risk, inflation risk, call risk and liquidity risk.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks and may be more volatile than investment-grade securities.

In addition to the risks generally associated with debt instruments, such as credit, market, interest rate, liquidity and derivatives risks, bank loans are also subject to the risk that the value of the collateral securing a loan may decline, be insufficient to meet the obligations of the borrower, or be difficult to liquidate.

Moody's Credit Ratings: Obtained after Moody's evaluates a number of factors, including credit quality, market price exposure and management. Credit Ratings are subject to change and do not remove market risk.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Federated Investment Counseling