CONTRIBUTORS
Glenn Voyles, CFA
Corporate Credit Portfolio Manager
Franklin Templeton
United States
Jon Belk, CFA
Corporate Credit Portfolio Manager/Research Analyst
Franklin Templeton
United States
Colby McVey, CFA
Corporate Credit
Investment Director
Franklin Templeton
United States
Key takeaways
- As the US Federal Reserve nears the end of its rate hiking cycle, we expect US high-yield issuers to tackle the refinancing of upcoming maturities from their pandemic-era issuances.
- We believe the potential deluge of high-yield issuance presents challenges but also opportunities for active credit managers to add value.
- Investors are well advised to prudently select performing credits based on issuer quality and to price idiosyncratic risks accordingly.
What does it all mean?
Against the backdrop of a potential increase in high-yield corporate bond issuance, we believe investment managers and prudent investors alike should be diligent in purchasing new issues while focusing on credit selection, quality and appropriate new issue pricing.
In our view, rates may be higher for an extended period as the FOMC seeks to avoid a repeat of previous high-inflation eras when rates were lowered prematurely before inflationary pressures fully subsided. While chief financial officers and corporate treasurers are generally holding off on issuing debt due to the expectations of lower rates later in 2024, our view of higher UST rates for a longer period of time should encourage them to issue debt sooner rather than later, as rates are not likely to decline rapidly, and current spreads should be appealing to issuers.
In light of these factors, we believe high-yield corporate bond managers are well advised to select performing credits based on the quality and durability of issuers’ business models and to price company-specific and new issue idiosyncratic risks accordingly. Skilled, active managers can bring considerable expertise to these tasks.
Franklin Templeton (FT) Fixed Income is here to help. Our active credit platform is part of the broader FT Fixed Income organization, allowing us to draw from the insights of more than 140 investment professionals responsible for managing over US$135 billion in assets. FT was a pioneer in the asset class and has a US high-yield track record dating back to 1969 (the beginning of the formation of the US high-yield market), making us one of the most tenured asset managers in the sector. Our emphasis is alpha generation through diligent fundamental credit research. Our active approach is driven by highest-conviction research ideas as a key alpha source. Our ability to manage duration, sector and security concentrations, combined with our longer-term investment horizon (3-5 years), allows us to be contrarian during bouts of volatility.
Read the full paper for background conditions, potential headwinds and what it all means.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value.
Equity securities are subject to price fluctuation and possible loss of principal.
Active management does not ensure gains or protect against market declines.