The financial (and mainstream) press spent much of the past few months detailing how energy issuers – oil & gas mostly – have been dragging down the high yield bond market in particular, and the credit markets in general.
The dire talk was not without reason, of course, as oil prices continue to plummet (they were near $50 per barrel today), and with energy issuers comprising a significant 17% of today’s high yield bond market, according to various estimates.
That’s the narrative, anyway. But as high yield guru Martin Fridson points out, there was a rebound in the speculative grade bond market during the second half of December that went largely overlooked, what with the swarm of oil crash stories. And which industry led the way during that period, return-wise? Fridson:
“… energy – the focal point of the December debacle – delivered the strongest second-half return of any major industry. (Our analysis focuses on the 15 largest high-yield industries.) For the month as a whole, Energy was the worst performer by far, at -6.24%. Observe, however, that December’s best performer, Healthcare at 0.43%, did less than half as well as Energy (2.56% versus 5.77%) from Dec. 16 through month-end.”
That’s not to say, of course, there’s a free ride as far as energy bonds are concerned. As Fridson pointed out earlier, a full third of the bonds in the BofA Merrill Lynch US High Yield Energy Index are now in distressed debt territory (meaning they have an option-adjusted spread of at least 1,000 basis points). But, after the massive sell-off of 2014, energy issues, along with metals & mining, were easily the cheapest major industries, per Fridson’s Fair Value analysis.
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