In a new report, UBS analyst Matthew Mish compares the current U.S. high-yield bond market cycle to the cycle that occurred in the late 1990s. According to Mish, comparisons to the 1990s support UBS's idea that high-yield bonds will likely generate solid returns in a low-yielding environment in coming years.
In terms of default rates, Mish sees similarities to the past cycle. "Our speculative grade default forecast (bonds and loans) of 5-6% for 2016 implies bond default rates that will look largely in-line with the year 2000," Mish explained.
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While high-yield valuations currently appear low compared to the previous cycle, he noted that much of the divergence is due to extremely low interest rates.
"HY bond valuations have re-priced significantly and are no longer expensive; in fact, the higher quality segments of the market will probably generate at least low-to-mid single digit excess returns, respectable in a low yielding environment," Mish concluded.
The SPDR Barclays Capital High Yield Bnd ETF (NYSE:JNK) is down 5.8 percent so far in 2016.
Disclosure: the author holds no position in the stocks mentioned.
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