Calamos Investments: Economic Outlook

High Yield
We believe the headwinds for traditional fixed-income asset classes remain formidable, given paltry yields and the risks associated with an eventual rise in U.S. short-term interest rates. The high-yield asset class, particularly energy issuers and bonds rated CCC and below, has also faced pressure due to falling commodity prices, global growth concerns, an approaching rate hike by the Fed and an increase in expected default rates. As investors have moved to a risk-off posture, we’ve seen a significant widening of spreads. (Figure 12).



However, we believe that at current valuations, there are opportunities within the high-yield market to generate compelling returns over the next 12 months, especially relative to other segments of the fixed-income market. Credit research will be increasingly important, going forward. As lending conditions tighten for high-yield issuers, we expect high-yield bond default rates to tick upward, but not soar. Moody’s Investors Service projects default rates rising from 2.3 percent over the past 12 months to 3.4 percent over the next year. Even at this higher level, defaults would remain below their 20-year average of 4.5 percent. Defaults may be kept in check as high-yield companies have refinanced their debt at low interest rates, a move that has reduced interest expenses and extended debt maturity profiles.

Our primary focus remains on combining our proprietary bottom-up research analysis with our top-down view to identify those issuers we believe will be upgraded out of high yield into the investment-grade universe over time. Historically, these bonds have provided a significant source of alpha for those managers that can identify them before the rating agency upgrade.

From an industry positioning standpoint, we are underweight issuers in the energy and metals/mining industries as we expect a challenging commodity price environment to persist over the next year. Our holdings in these industries are primarily in issuers that have more than sufficient liquidity to weather the downturn and own assets to provide ample protection in the event commodity prices trade even lower. We continue to overweight sectors that will benefit from the strength in U.S. consumer spending. In our view, industries such as retail, consumer goods, homebuilding and automotive are all likely to experience improving fundamentals over the next year.


John P. Calamos Sr. is chairman, CEO and global co-CIO of Calamos Investments, a firm he founded in 1977. With origins as an institutional convertible bond manager, the firm has grown into a global asset management firm with major institutional and individual clients around the world. The firm is headquartered in the Chicago metropolitan area with additional offices in New York City and London.