- Yields across the corporate credit market have declined over the past year as investors continue to demand income-oriented investments. Even within today’s lower-yield environment, however, energy stands out as one of the few sectors that has continued to offer investors the opportunity to generate attractive yields.
- Even after a recent decline, yields on high yield energy bonds offer a premium of nearly 100 basis points over the broader high yield bond index.26 Similarly, energy senior secured loans’ yield of approximately 10.86% is nearly 5% above that of the Credit Suisse Leveraged Loan Index.27
- Energy’s yield premium remains relatively high even as the sector appears to be recovering from oil’s long-standing supply glut. For example, investors have adopted a more optimistic tone toward energy investments given recent evidence that OPEC’s production cuts, combined with the IEA’s latest upward revision to global demand, may be helping to bring the market closer to equilibrium.28
- Oil prices have moved into bull market territory, rising approximately 22% from their June 21 low of $42.31 per barrel, and credit prices have recovered sharply month to date.29 In September, BB, B and CCC energy bonds are returning +1.82%, +2.87% and +8.09%, respectively.30
1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Federal Reserve Bank of St. Louis, http://bit.ly/292Tgue.
3 Thomson Reuters Lipper, high yield bond mutual fund flows.
4 Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index.
6 Bank of America Merrill Lynch U.S. High Yield B Rated Index.
7 Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
8 Credit Suisse Leveraged Loan Index.
9 Thomson Reuters Lipper, bank loan mutual fund flows.
10 Bank of America Merrill Lynch U.S. Corporate Master Index.
11 Bank of America Merrill Lynch U.S. 2-Year Treasury Bond Index.
12 Bank of America Merrill Lynch U.S. 10-Year Treasury Note Index.
13 Investment Week, http://bit.ly/2k8cAk1.
14 International Energy Agency, http://bit.ly/1ylJ2td.
15 MarketWatch, http://on.mktw.net/2wWQKoI.
16 U.S. Energy Information Administration, http://bit.ly/1V2gPZQ.
17 Baker Hughes, http://bit.ly/1BMeq7M.
18 Bank of America Merrill Lynch U.S. High Yield Energy Index.
19 Credit Suisse Leveraged Loan Index (Energy Component).
20 CNBC, http://cnb.cx/2fzWs9r.
21 Bureau of Economic Analysis, http://bit.ly/1DqcVBJ.
22 Bureau of Economic Analysis, http://bit.ly/2xLGjEm.
23 The U.S. Federal Reserve, http://bit.ly/2yqqBvX.
24 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
25 The Wall Street Journal, http://on.wsj.com/2yy5Dei.
26 Yield-to-worst on the energy component of the J.P. Morgan High Yield Bond Index, as of September 28, 2017.
27 Yield to 3-Year takeout on the energy component of the Credit Suisse Leveraged Loan Index, as of September 28, 2017.
28 International Energy Agency, http://bit.ly/1ylJ2td.
29 West Texas Intermediate Cushing Crude Oil Spot Price, as of September 28, 2017.
30 BB, B, and CCC rated components of the J.P. Morgan High Yield Energy Index, as of September 28, 2017.
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