Investors could be about to lose one of the last ports in the credit storm.
After a relentless eight-week retreat, America’s riskiest high-yield debt is now on the cusp of erasing its gains for the year. And if Wall Street bears are right, the recent pain is just a taste of what’s to come.
Guggenheim Chief Investment Officer Scott Minerd says the asset manager has already reduced corporate credit exposure to “the lowest levels since the financial crisis.’’ Now CCC rated debt is poised for significant underperformance over the next year, according to the firm’s analysts.
The catalyst for such doom and gloom? The “reach for yield” attitude that characterized the quantitative easing era is now reversing, and it’s stirring concern across corporate debt markets. With short-term bonds now offering a positive real return, there’s less need for investors to go up the risk spectrum. The pockets of the market most vulnerable to downgrades or defaults are in focus as investors contemplate a turn in the business cycle.
Beneath the Angels
Until now, BBB rated debt -- a group which includes embattled General Electric -- has been at the center of the storm.
This $2.5-trillion portion of the market is composed of companies on the last rung of the investment-grade ladder. If downgraded to junk, these so-called “fallen angels” would face higher refinancing costs as well as a drop-off in demand for existing issues.
But strategists are growing increasingly concerned about the least-creditworthy debt.
The Bloomberg Barclays CCC Index has declined more than 5 percent over the past eight weeks, the longest losing streak since 2015. In the process, CCC debt surrendered its crown for best U.S. credit performance this year. Higher-quality, B rated bonds have now provided a better return.
U.S. speculative-grade companies face a slew of challenges including rising rates, a slowing global economy, and domestic expansion getting ever longer in the tooth. Tumbling crude prices can also have a big impact on this segment -- energy companies comprise about 16.5 percent of the Bloomberg Barclays U.S. CCC Index by debt outstanding, slightly more than for the U.S. high-yield market as a whole.
“There is more pain to be felt in CCCs,’’ write Guggenheim’s Thomas Hauser and Rich de Wet.