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Corporate Bond Commentary

PWM Fixed Income Research

While well below historical averages, corporate
bond and loan default rates reversed the downward B Craig Elder, Director
Fixed Income Senior Analyst
trends in November and some high yield bond deals
have been recently been rejected by investors.
Also, Moodys LSI was unchanged in November
(although still at an all-time low) raising concern that
the credit cycle has peaked.

December 11, 2017

Corporate Bond Market Comments
Spreads remain tight in both investment-grade and high yield bonds but we are beginning to see some signs that the
credit cycle could be nearing an end as Moodys Liquidity Strength Index (LSI) has bottomed (although at record lows)
and investors have begun to reject deals based on the basis of the deal covenants and yields they deem inadequate for
the risks involved.
While the rating agencies are forecasting that default rates will continue to fall in 2018, Moodys default rate reversed that
trend in November with its leveraged loan default rate rising to 2.0% in November from 1.7% in October and its
speculative-grade default rate increasing to 3.0% in November from 2.8% in October. Not only were Moodys default rates
higher but CreditSights reported that its default rate increased to 4.0% in November, up from 3.7% in October. This could
be a sign that liquidity for issuers is becoming a bit harder to find as the lack of ability to raise funds is the biggest
determinant of corporate loan and bond default rates.
Investment-grade corporate bonds yields ended last week at 3.25% while the spread level over comparable Treasury
yields was 97 bps. The IG yield level began the year at 3.39% resulting in yields falling 14 bps this year while spread
levels were 122 bps over at the onset of 2017 resulting in spread tightening of 25 bps this year. Investment-grade
corporate bonds have a year-to-date total return of 5.89% and 6.50% over the past 12-months.

Investment-Grade Corporate Bond Total Return and Statistical Data 12/8/17

TR-12 YTD Yield Spread Price Coupon Mat Dur Convexity
IG Corporate 6.50% 5.89% 3.25% 97 $105.54 3.95% 11.03 7.58 1.11
Aaa 7.96% 7.03% 3.02% 58 $105.00 3.33% 17.83 11.01 2.23
Aa 4.67% 4.25% 2.70% 52 $103.11 2.97% 9.06 6.44 0.93
A 6.05% 5.46% 3.03% 75 $106.10 3.75% 10.82 7.61 1.12
Baa 7.19% 6.52% 3.55% 125 $105.51 4.33% 11.26 7.60 1.07

Industrial 6.79% 6.07% 3.34% 102 $105.70 4.04% 12.14 8.12 1.25
Utility 7.84% 9.98% 3.36% 94 $109.14 4.27% 15.21 10.04 1.74
Financial 5.65% 5.30% 3.06% 87 $104.47 3.72% 7.95 5.99 0.68
Source: Bloomberg Barclays Indices

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Corporate Bond Commentary, continued

Preferred securities have a year-to-date total return of 10.82% and a trailing-12 month total return of 11.49%, according to
data from Bank of America Merrill Lynch Indices. Leveraged loans have a total return this year of 4.04% and a trailing-12
month total return of 4.74%, according to the same indices.
High yield spreads ended the week at 347 bps over comparable Treasury yields while the yield level was 5.70%. High yield
spreads began the year at 398 bps over which has resulted in tightening of 51 bps year-to-date while yields have fallen
from 6.01% at the onset of 2017 resulting in yields down 31bps. High yield corporate bonds have a total return of 7.24%
year-to-date and 8.01% over the trailing 12-months, according to data from the Bloomberg Barclays Indices.

High Yield Corporate Bond Total Return and Statistical Data 12/8/17
TR-12 YTD Yield Spread Price Coupon Mat Dur Con
High Yield 8.01% 7.24% 5.70% 347 $100.94 6.40% 6.28 3.86 (0.34)
Ba 7.15% 7.66% 4.30% 209 $104.53 5.60% 6.85 4.38 (0.21)
B 6.26% 7.03% 5.68% 348 $101.09 6.59% 6.15 3.60 (0.53)
Caa 9.81% 11.25% 8.33% 612 $95.07 7.84% 5.15 3.11 (0.24)
Ca-D 11.93% 14.49% 24.85% 2,092 $64.73 8.54% 3.38 2.71 0.11
Ba/B 6.72% 7.35% 4.96% 276 $102.85 6.09% 6.51 4.01 (0.37)

Industrials 7.67% 6.84% 5.82% 358 $100.50 6.43% 6.31 3.85 (0.36)
Energy 8.09% 7.32% 6.37% 408 $98.72 6.45% 6.67 4.27 (0.16)
Retailers 1.86% 1.72% 8.32% 584 $92.08 6.51% 6.48 3.66 (0.23)
Utilities 12.79% 12.01% 5.10% 295 $102.32 6.41% 6.59 3.51 (0.52)
Financial 9.88% 8.78% 4.75% 260 $104.80 6.12% 5.86 4.07 (0.12)
Source: Bloomberg Barclays Indices

CreditSights Default Rate Comments

CreditSights said that its U.S. High yield issuer-weighted default rate was 4.0% at the end of November, rising from 3.7%
in October the first increase seen since December 2016. The HY Commodities default rate was unchanged at 6.2%
(only 10 bps above its long-term historical average-from December 1998 to November 2017) in October. The U.S. High
Yield default rate when commodities are excluded was 3.3%, an increase of 30 bps from the end of October level of 3.0%.

Moodys LSI Falls to a Record Low

In November Moodys Liquidity-Stress Indicator (LSI) remained at the all-time low set in October. Moodys said that new
issuance remained healthy although some deals were pulled from the market because of investor pushback. According
to Dealogic, November issuance was $27 billion which was more than October issuance of $25 billion. They indicated that
for now, the LSIs decline over the last year supports their forecast that the U.S. spec-grade default rate will drop to 2.1%
in October from the current level of 3.2%.

Bloomberg: Bond News
Bloomberg Barclays Indices
CreditSights: Monday Morning Meeting Notes. Focus on the Fed Meeting. December 11, 2017.
CreditSights: U.S. and Euro HY Default Rates: November 2017. December 6, 2017.
Moodys: SGL Monitor. December 1, 2017.
Moodys: December Default Report. December 8, 2017.

Robert W. Baird & Co. Incorporated

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Corporate Bond Commentary, continued

Appendix Important Disclosures

Some of the potential risks associated with fixed income investments include call risk, reinvestment risk, default risk and
inflation risk. Additionally, it is important that an investor is familiar with the inverse relationship between a bonds price and
its yield. Bond prices will fall as interest rates rise and vice versa.

When considering a potential investment, investors should compare the credit qualities of available bond issues before
they invest. The two most recognized rating agencies that assign credit ratings to bond issuers are Moody's Investors
Service (Moodys) and Standard & Poor's Corporation (S&P). Moodys lowest investment-grade rating for a bond is
Baa3 and S&Ps lowest investment-grade rating for a bond is BBB-. Ratings are measured on a scale that ranges from
AAA or Aaa (highest) to D or C (lowest).

This is not a complete analysis of every material fact regarding any sector, municipality or security. The opinions expressed
here reflect our judgment at this date and are subject to change. The information has been obtained from sources we
consider to be reliable, but we cannot guarantee the accuracy. It is strongly recommended that an investor discuss with
their financial professional all materially important information such as risks, ratings and tax implications prior to making an
investment. Past performance is not a guarantee of future results.

This report does not provide recipients with information or advice that is sufficient on which to base an investment decision.
This report does not take into account the specific investment objectives, financial situation, or need of any particular client
and may not be suitable for all types of investors. Recipients should consider the contents of this report as a single factor in
making an investment decision. Additional fundamental and other analyses would be required to make an investment
decision about any individual security identified in this report.



Copyright 2017 Robert W. Baird & Co. Incorporated.

Robert W. Baird & Co. Incorporated

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