Our High Yield Team sheds light on the dynamics affecting leveraged credit investing in this year-end market review and outlook.
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Highlights & Key Takeaways
- Inflation, a sharp turn in Fed policy, the war in Ukraine, and a faltering global economy combined to widen spreads meaningfully from levels seen at the end of 2021.
- The volatility in 2022 negatively affected the performance of high yield bonds and leveraged loans and had a meaningful impact on capital market activity. Following the record issuance of bonds and loans in 2021, leveraged credit primary market activity slowed considerably.
- The macroeconomic picture remains troubling, and the global economy is under pressure. In 2023, we expect a reduction in inflation from current near-historic levels. Moreover, we expect greater clarity as the Fed seeks to reset rates to a more appropriate, sustainable level.
- It is important to consider that large declines in price can provide tremendous opportunity for active managers. We believe that our focus on deep fundamental analysis enables us to uncover competitive businesses that generate high free cash flow and are often overlooked by market participants. These businesses are well positioned to survive periods of economic uncertainty, even if the prices of their bonds or loans temporarily decline along with the broader market.
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We believe 2022’s turmoil, while challenging, improved the forward return trajectory for credit. Specifically, high yield now offers compelling absolute yields, with stronger fundamentals relative to pre-pandemic conditions.
—Dave Breazzano, Head of Team, U.S. High Yield
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This information is provided for illustrative purposes only. Opinions and views expressed constitute the judgment of Polen Capital as of December 2022 and may involve a number of assumptions and estimates which are not guaranteed, and are subject to change without notice or update. Although the information and any opinions or views given have been obtained from or based on sources believed to be reliable, no warranty or representation is made as to their correctness, completeness, or accuracy.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice, including any forward-looking estimates or statements which are based on certain expectations and assumptions. The views and strategies described may not be suitable for all clients.
This document does not identify all the risks (direct or indirect) or other considerations which might be material to you when entering any financial transaction. Past performance does not guarantee future results and profitable results cannot be guaranteed.
The ICE BofA U.S. High Yield Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. Please note that one cannot invest in the index. The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of USD institutional leveraged loans, including U.S. and international borrowers. Please note that one cannot invest in the index.