Throughout the five-year rally in high-yield bonds, market participants have expressed concern that corporate defaults will soar, especially as issuing terms have eased.
But don't panic, say Goldman Sachs analysts. "We are sympathetic to the worries surrounding the loosening of lending standards in the leveraged loan market," they write in a commentary obtained by
CNBC.
"But we don't think this will drive corporate defaults higher in the near-to-medium term."
The U.S. speculative-grade default rate now stands at only 1.5 percent, according to Standard & Poor's. To be sure, its analysts expect the rate to reach 2.7 percent by June 2015.
Surprisingly enough, covenant light loans — those with loose requirements for the borrower — generally perform better than covenant heavy ones, Goldman analysts say.
They note data from S&P Capital IQ showing that the cumulative default rate is 19 percent since 2008 for covenant heavy issuers, compared with 10.3 percent for covenant light ones.
"With fewer covenants to violate, covenant-lite issuers were in a better position to weather the storm of the recession, which explains their outperformance in terms of defaults," the Goldman analysts write.
Meanwhile,
Pimco high-yield portfolio managers Andrew Jessop and Hozef Arif think now is the time for investors to dive into the high-yield market.
"Today, high-yield spreads and yields are materially wider [than at the peak of the high-yield bond rally in May,] and fundamentals remain compelling," they write in a commentary on Pimco's website.
The Barclays U.S. Corporate High Yield index has returned 2.96 percent so far this year.
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