Get ready for a junk bond default cycle: Deutsche Bank

One of the biggest sources of anxiety among investors at the start of 2016 was the high-yield bond market. Specifically, the market for high-yield (or junk) bonds issued by oil and gas companies. As the price of oil plunged below $30 in January and February, investors rushed to sell debt issued by companies who needed expensive oil to stay profitable. But the ticking bomb that people were expecting to explode —a wave of defaults rivalling the sub-prime housing crisis of 2008 — hasn’t happened.

Investors are about a year early with their concerns, according to a report by analysts at Deutsche Bank, with the default cycle for junk bonds expected to peak in 2017 or 2018.

Deutsche Bank says that their US strategists have pointed out that US Financial equities have tended to underperform the S&P500 by 15-20% in the year leading up to the previous three default cycles we've identified. They are underperforming the index by around 10% since reaching their recent peak level in August 2015.