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Widening spreads could provide a step back into high yield.

Published January 23 2024
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Video Transcript
Question: What factors could create an attractive entry point to high yield in 2024?
Mark Durbiano: So right now we think spreads and valuations are pretty dear right here. And we think spreads are a little tighter and need to move wider. And we think we'll see that happening somewhere here in early 2024. Now we don't think we're going to see the spikes we've typically seen associated with past periods of economic weakness, where many times high-yield spreads, which are today around 400 basis points, can move up over 1,000 basis points. We don't see that type of environment evolving, and a couple of reasons why. First of all, the high-yield market has really moved higher in overall quality over the past decade or so. So you're just dealing with a higher quality market and that would argue secularly for lower spreads. Secondly, companies came into this time period just financially much stronger than they typically have in most periods. Most of the real aggressive lending took place in the leverage loan market and the private credit markets and high yield just didn't participate in that. Therefore, overall risks were lower entering what we think will be a period of somewhat weaker earnings here. And then finally also supply has been pretty weak. So typically when you get into market downturns and you face an onslaught of supply, that pushes the secondary market lower. And we just haven't seen that over the past couple of years and we won't think we'll see that in 2024. So we think right now valuations are a little too rich to be making major entry points, but we do think we will get an opportunity here somewhere early in 2024 where spreads will move wider, providing a more attractive entry point.
Tags Fixed Income . Markets/Economy .

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.

Past performance is no guarantee of future results.

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

Issued and approved by Federated Investment Management Company