Much of the story in the high yield market over the last almost three years now has been energy related. In the summer of 2014, we were seeing oil prices (WTI) surpass the $100 level. In the fall of 2014, oil prices started to falter continuing the downward slide all through 2015 until hitting a bottom of sub-$30 in early 2016.1
As of the summer of 2014, energy related securities were 18% of the high yield bond market index2, the largest industry concentration in the index by far. As we saw oil prices slide, we saw the high yield bond market take a step back. Once we started seeing oil continue to trend below the $50 price in early 2015, we started seeing the daily returns in the high yield market very tied to the daily moves in oil prices.3
Especially from early 2016 to early 2017 we saw that correlation between oil prices to high yield returns, as oil rebounded from the $26 WTI price low in February 2016 to the current level around $50, all the while the high yield market posted strong double-digit returns.
Over the last couple months we have seen returned volatility to oil prices; though while prices are moving up and down, often more than 1% in a single day, it has been within a tight range of about $45 to $50. But, of note, over this recent period, we have seen a decoupling of the high yield market returns and oil prices.4
We have seen a steady move upward in high yield bonds, even on the days when we are seeing a fall in oil prices. Factors other than oil prices are driving the high yield market, and to us that makes sense. Many of the weaker energy related companies have already been weeded out and forced to restructure, with energy-related defaults at 12.4%, or 17.2% including distressed exchanges, during 2016, which accounted for 67% of total high yield market defaults and distressed exchanges for last year.5 Over the past few years, energy companies have been forced to become more efficient. While energy remains the largest industry concentration within the high yield market at 15%6 and we do still see some vulnerable issuers within the high yield indexes if oil prices stay below $50 for a prolonged period (as the higher cost/highly levered producers will be pressured), given the restructurings we have already seen over the last two years these problem credits are not nearly as widespread as they were going into 2015 and 2016. Furthermore, we don’t see much in the near to medium term to move oil prices significantly above or below this range—globally we are seeing some demand growth, but we are also seeing some supply come back on, especially here in the US shale regions, as prices hover around $50.
Thus as we look at the high yield landscape today, and the energy sector within it, we believe the “energy-contagion” may well to continue to have less and less of an impact, as investors focus more on the interest rate and economic environment and yield the high yield market has to offer investors.
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