High Yield Bond Funds: Analysis of Credit Spreads and Default Risk
Credit spreads for high-yield bond funds are holding near historical lows.Despite this, fund managers are tightening their scoring of issuers' credit quality.
Key market parameters:
- OAS spread: The spread to Treasuries is 310 bps, below the historical average of 450 bps.
- Default forecast: The expected default rate for the next 12 months is projected to be between a comfortable 2.8% and 3.2%.
Selection strategy
Fund managers give preference to issuers of the BB rating category with a high coverage of interest payments by operating profit (Interest Coverage Ratio > 3.5x).