“One man’s trash is another man’s treasure” may be a cliché, but it has never been more applicable to the below-investment grade, or junk, market. As the macroeconomic backdrop has proven to be more resilient than investors feared heading into 2023, one of the primary beneficiaries has been CCC corporates — traditionally the riskiest securities within the high yield and leveraged loan markets. CCC bonds and loans are the least credit-worthy within their respective markets and tend to perform poorly in periods of economic stress. With the economy so far avoiding recession, this segment of the market has posted significant gains year-to-date. CCC bonds and loans were up 11.0% and 8.3% through the first half, respectively, notably outperforming the broader high yield and leveraged loan indices, up 5.8% and 6.3%, and especially the highest-rated, or BB, segments of each market, up 4.5% and 4.6%, respectively.
On top of better-than-feared macroeconomic conditions, other factors have contributed to the junk rally in these markets. Leveraged credit balance sheets, even amongst the lowest-rated issuers, remain well positioned to weather headwinds. High yield issuer leverage is at a 10-year low while leveraged loan issuer leverage levels are at multi-year lows with interest coverage metrics slightly below all-time highs. Defaults are expected to increase, though only to the long-term average of the asset class, assuaging fears of a wave of defaults. Additionally, market technicals have helped fuel this rally as issuance has remained light, causing what supply is out there to benefit from a continual bid due to the elevated yield on these securities. All of this said, CCCs are still typically the riskiest part of the fixed income market, and continued performance hinges on the notoriously-unpredictable economy.
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