Junk Bond Forecasts Are Quickly Going From Good to Great

(Bloomberg) -- Junk bonds limped into 2019 nursing wounds from a December rout that was the worst month for the market since 2011. After a robust rally to start the year, strategists are significantly upgrading their annual forecasts.

Most bullish on the asset class is Wells Fargo, which boosted its high-yield total return forecast to 9.9 percent, from a 6-7 percent call made last year. An attractive starting yield, fundamental backdrop and slight uptick in issuance are all positive drivers, the bank said in a Jan. 4 report.

The turnaround is stunning given that December was the first month with no issuance for the asset class in at least a decade. High-yield debt fell 2.14 percent that month during the year-end market turmoil. After a 3 percent jump since the start of the year, other strategists swiftly joined in on the junk-bond optimism.

Barclays beefed up its high-yield bond total return call to 6.5-7.5 percent from a 3.5-4.5 percent projection made at the end of November. This compares to a 2.1 percent loss in 2018, the worst for the sector since 2015.

"We see more supportive technicals in place for high yield, with falling dependence on retail flows given our expectation of another year of shrinking new issue supply," analysts led by Bradley Rogoff said in the report dated Jan. 11. The December slump was "more of a liquidity-driven event, as opposed to a more negative reassessment on growth and earnings prospects for the year ahead," they added.

JPMorgan raised its U.S. high-yield bond return forecast to 8 percent, from 3.3 percent at the end of November. It cited a meager chance of a recession, low rates and attractive valuations as reasons to buy.

Bear Turns Bull

Even Morgan Stanley -- historically one of the most bearish credit prognosticators -- expects a better year for junk. In a Jan. 11 report, it lifted its high-yield total return forecast for 2019 to 4.5 percent from 0.5 percent previously, though analysts led by Adam Richmond maintain that credit is in a long-term bear market, which can still have "strong tactical rallies in between."

"Our 2019 return forecasts are low, but marketing-to-market, the numbers look modestly better," the report said.

Returns Forecasts for 2019

Loans Less Favored

Barclays also boosted its expectation for leveraged loans to 7-8 percent from 4.5-5.5 percent previously. Barclays said its earlier forecast already reflected moderating growth and an unlikely recession in 2019, but said its latest numbers "essentially account for the recovery of the losses incurred in December on top of the returns we originally forecast for 2019."

This month’s strong jobs employment report is in line with the "momentum of domestic growth" that Barclays sees carrying through this year and moderating in 2020, the report said.

Morgan Stanley, which prefers high-yield to loans, also revised its total return estimate for loans to 4.3 percent, from 1.3 percent originally.

Neither Wells Fargo nor JPMorgan altered their loans forecast, which stand at 3-4 percent and 6 percent gains for the year, respectively.

"We prefer high-yield bonds to leveraged loans, as the demand for fixed-rate products stabilizes and demand for floating rate products decelerates as we expect that the Fed pursues fewer rate hikes (1-2) in 2019," said Wells Fargo in the report.

To contact the reporter on this story: Kelsey Butler in New York at kbutler55@bloomberg.net

To contact the editors responsible for this story: James Crombie at jcrombie8@bloomberg.net, Dave Liedtka

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