So-Called Junk Bonds Yielding Riches

These risky investments are paying off.

High-yield corporate bonds have outperformed investment-grade debt so far this year, with the lowest-rated sector producing the highest returns. Meanwhile, emerging market corporate high-yield default rates have fallen below 1% for the first time since 2012.

“Investing is not about absolute levels of riskiness, but rather about identifying situations where known risks are mispriced,” says Jan Dehn, global head of research at Ashmore. “The declining default rate for emerging market high-yield debt also underlines the point that the problems faced by Turkey and Argentina this year are not representative of the situation in the rest of emerging markets.”

According to Fitch Ratings, US institutional leveraged loan and high-yield bond default rates are expected to decline to 1.5% in 2019, from around 2% at the end of this year. “Fitch is not forecasting an economic downturn next year, but low default rates typically coincide with the beginning of recessions,” the rating agency said in a release. “Lower default rates should be considered in the context of the stage of the credit cycle, as improving profitability, open access to capital markets and looser credit terms are typical markers of late-cycle stages.”

The Federal Reserve Senior Loan Officer survey shows nine straight quarters of easing lending standards. Fitch says the 2019 high-yield default rate is expected to be modestly above the broader market at 2%, but well below the January 2017 peak of 19.7%.