High-yield corporate bond spreads and bank loan discount margins typically widen when the Fed is lowering interest rates.

Here are the key takeaways from our third quarter High-Yield and Bank Loan Outlook report:

  • Investors may be tempted to go down in quality in anticipation of a Fed-induced rally in leveraged credit. History suggests this would be ill-advised.
  • On average since 1986, high-yield corporate bond spreads and bank loan discount margins widened by 131 basis points and 294 basis points during Fed easing periods, respectively.
  • Some market participants draw comparisons between today and the experience in 1998, when the Fed successfully extended the economic cycle. We argue that this comparison warrants some caveats as it relates to credit, since the mini-easing cycle in 1998 was followed by several years of above-average default rates.
  • Even if the Fed eases rates aggressively, our base case is that at year-end, high-yield corporate bond spreads and bank loan discount margins will be wider than where they ended the first half of 2019.

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Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

One basis point is equal to 0.01 percent.

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