CIO’s Perspective: 2016 Leveraged Credit Review and 2017 Outlook

Posted on January 3, 2017

High yield bond performance in 2016 (as measured by the BofA Merrill Lynch U.S. High Yield Bond Index (“HYBI”)) recovered from early losses to post the asset class’s third highest annual total return during the past twenty years (17.49%), trailing only 2009 (57.51%) and 2003 (28.15%), respectively. As Exhibit 1 below shows, after generating an impressive gain of 9.32% through the first six months of the year, high yield bonds added an additional 7.47% in 2H16. High yield bond spreads compressed considerably in 2016, tightening a total of 273 basis points, including a 199 basis points decline in the second half of the year (“2H16”).Similarly, leveraged loans (as measured by the JP Morgan Leveraged Loan Index (“LLI”)) generated solid results, posting a gain of 9.78% for the year. This increase was the fourth largest in the index’s ten year history. In addition, leveraged loan performance of 5.24% in 2H16 was more attractive than the first half of the year. Spread compression for leveraged loans in the second half of the year was a healthy 113 basis points, far exceeding the 46 basis points of tightening experienced by leveraged loans during 1H16.

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