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Video: 2019 outlook for US high-yield bonds

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      By Kelley G. Baccei, High Yield Portfolio Manager, Eaton Vance Management

      Boston - There are plenty of concerns in the high-yield bond market today, but we think the fundamental backdrop for issuers is generally supportive. We expect growth in the U.S. economy in 2019, albeit slower growth.

      One of the main themes we're expecting for 2019 is more volatility. There was a sharp change in investor sentiment in the back half of 2018 as risk was repriced. So we expect there to be continued dispersion within credit spreads, where credit selection really makes a difference this year.

      (Tap or click the image below to view the video.)

      Blog Image Baccei Outlook Jan 17

      Yet overall, the backdrop is still relatively healthy. We think the default rate this year in high-yield bonds will be somewhere in the range of 2% to 2.5%, which is below the historical average. We believe leverage remains benign, and interest coverage is still at historically high levels.

      However, there are certainly more challenges this year that companies face versus last year. We started to see some more of what we think is end-of-cycle behavior among companies in the second half of 2018. As we approach peak earnings, companies started to reach and M&A transactions were more leveraged and aggressive.

      So we think going into 2019 there might be some indigestion from some ill-timed acquisitions, but as the cost of capital has increased, this may put a damper on some of that behavior. And we believe companies will be more disciplined in managing their balance sheets. So overall, while we expect there to be volatility, we think it's really a credit picker's market. And we believe that as we started out with wider spreads and higher yields, there will be some good opportunities this year.