U.S. High Yield Faces Double Whammy

The spread of the novel coronavirus (Covid-19) has increased the downside risks to the fundamental picture for the US HY market.
Compounding the situation is the plunge in oil prices in the wake of the collapse of talks between members of OPEC+ and the subsequent price war between Russia and Saudi Arabia.
Looking ahead, the outlook for the HY sector will be largely dependent on the duration of both the coronavirus outbreak and the oil price war.
By Glenn Voyles, Director of Portfolio Management, Corporate Bonds, Franklin Templeton Fixed Income; Bryant Dieffenbacher, Research Analyst, Franklin Templeton Fixed Income and Matt Fey, Director of Research, Corporate Bonds, Franklin Templeton Fixed Income
Financial markets across the globe have been dealt a one-two punch - the spread of the coronavirus and an oil price war that caused prices to plummet. Glenn Voyles, Matt Fey and Bryant Dieffenbacher of Franklin Templeton Fixed Income examine the impact on high-yield credit.
US high yield (HY) spreads have widened significantly over the past few days, to levels last seen in early 2016, with likely further spread widening to come. The selloff is a result of simultaneous negative shocks to demand and supply.
The spread of the novel coronavirus (Covid-19) has increased the downside risks to the fundamental picture for the US HY market. While much uncertainty remains, a prolonged period of economic disruption could impact a broad cross-section of issuers in the asset class and drive up the default rate, albeit from historically low levels.
Compounding the situation is the plunge in oil prices in the wake of the collapse of talks between members of OPEC+1 and the subsequent price war between Russia and Saudi Arabia. If current oil prices persist, a majority of the issuers within the HY exploration and production (E&P) and energy services industries could be at risk of default over the longer term.
To put things in perspective, energy is the largest... Read more