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Commodities Prices Won't Knock High Yield Off Its Perch

Although depressed commodities prices have impacted credit quality, moderate economic growth in the U.S. should hold down defaults and support the high-yield market.

Dave Sekera: Slowing global economic growth, the rising value of the U.S. dollar, and increased supply have pushed down almost all commodity prices during the past 12 months. As such, credit spreads in the basic-materials and energy sectors have widened considerably to account for the increased probability of default risk. These sectors account for a significant portion of the overall corporate-bond index, and wider credit spreads in these sectors have impacted the entire index.

The average spread of the Morningstar Corporate Bond Index has widened 34 basis points thus far this year to an average spread of 174 basis points over Treasuries. In the high-yield market, the average spread of the BofA Merrill Lynch US High Yield Index has widened 60 basis points to an average spread of 564 basis points. The combination of wider spreads and slightly higher interest rates has taken its toll on bond returns. Year to date, the investment-grade index has fallen about one quarter of a percent, and high yield has only risen about one half of a percent.