Chart of the week: A solid fundamental backdrop

  • With a return of approximately 7.0% through the first three quarters of 2017, high yield bond investors continue to enjoy a prolonged period of strong total returns.4 Credit markets have been boosted this year by stable economic conditions, an accommodative interest rate environment and rising oil prices. A solid fundamental backdrop has also helped to support high yield bond prices.
  • For example, growth in earnings before interest, tax, depreciation and amortization (EBITDA) among high yield companies was up 11.1% during the second quarter of 2017.20 The figure moderated from the first quarter of this year, but both quarters have produced the strongest EBITDA growth in more than two years.21
  • Year-over-year revenue growth has followed a similar pattern as EBITDA. For example, revenue growth among high yield issuers also declined in the second quarter of 2017 versus the first quarter.21 Like EBITDA, however, each of the first two quarters still saw the largest gain since the final quarter of 2014.21
  • At the same time, leverage among high yield issuers declined slightly during the second quarter.21 Though it remains above its post-crisis low of approximately 3.87x during the third quarter of 2012, leverage has declined for each of the past four quarters.21
  • On balance, this relatively positive fundamental backdrop has helped to bring the default rate on high yield bonds to an approximately 4-year low while prices remain at, or near, their post-crisis high.1,21

1 Federal Reserve Bank of St. Louis, http://bit.ly/2d3pN5b.
2 Reuters, http://reut.rs/2gh4VeV.
3 Federal Reserve Bank of St. Louis, http://bit.ly/29ecBfp.
4 Bank of America Merrill Lynch U.S. High Yield Master II Index.
5 Bank of America Merrill Lynch U.S. High Yield Energy Index.
6 Bank of America Merrill Lynch U.S. High Yield CCC & Lower Rated Index.
7 Bank of America Merrill Lynch U.S. High Yield B Rated Index.
8 Bank of America Merrill Lynch U.S. High Yield BB Rated Index.
9 Credit Suisse Leveraged Loan Index.
10 Thomson Reuters Lipper.
11 Bloomberg, federal funds futures based on CME data.
12 Federal Reserve Bank of St. Louis, http://bit.ly/2anGvQ0.
13 Institute for Supply Management, http://bit.ly/2u7Z6Fq.
14 Institute for Supply Management, http://bit.ly/2g2jSi6.
15 CNBC, http://cnb.cx/2z385uy.
16 The Wall Street Journal, http://on.wsj.com/2xm0Hx6.
17 The Wall Street Journal, http://on.wsj.com/2kqjOjE.
18 Bureau of Labor Statistics, http://bit.ly/2iYbHWM.
19 CNBC, http://cnb.cx/2xX4Ozn.
20 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, as of September 26, 2017.
21 J.P. Morgan High-Yield and Leveraged Loan Morning Intelligence, as of October 5, 2017.


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