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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
The sell-off in most fixed income assets over the course of 2022 has been brutal. Pernicious and stickier-than-expected inflation, a hawkish US Federal Reserve (Fed) laser-focused on the inflation portion of its dual mandate, and the ongoing Russia/Ukraine conflict have derailed the decades-long fixed income bull market. However, the two biggest drivers of this year’s downturn have begun to abate:
While macro uncertainties remain, and market volatility is likely to stay elevated, we believe large swaths of fixed income look more attractive than they have in some time.
One area that we believe stands out these days is the investment-grade (IG) corporate credit market. As of this writing, current yields on IG credit are in the mid-single digits — a decade-long high. Most of these high-quality companies have very low default risk, and many have been trading at significantly discounted US dollar (USD) prices. For example, as of November 30, the Bloomberg US Investment Grade Credit Index traded at an average yield of 5.3% and an average USD price of $89.1. A low USD price can be an important credit metric: In the unlikely case of distress or default, the bondholder has legal recourse to seek the bond’s full par amount (face value), even if it was purchased at a below-par level.
Moreover, while a slowing global economy could lead to wider credit spreads going forward, we believe USD rates have now reached levels that can potentially serve as an adequate cushion against a broader sell-off in risk assets. The defense supplied by this cushion is twofold: 1) higher bond coupons (yields) that can help offset any short-term market price declines; and 2) the historically diversifying nature of having portfolio exposure to interest-rate risk and credit risk.
There are some relatively simple, straightforward ways to implement a positive view on IG credit. For instance:
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Spread the risk: Our top three fixed income diversifiers for 2023
Fixed Income Strategist Amar Reganti highlights three types of strategies that may be well positioned to provide fixed income portfolio diversification going forward.
CLOs: Poised to outperform in 2023?
Collateralized loan obligations (CLOs) have been sparking investor interest lately — and with good reason, say Investment Director Andrew Bayerl and Investment Specialist Celene Klimas.
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Fixed Income Portfolios managers Jeffrey Heuer, CFA and David Marshak and Investment Director Nick Leichtman describe what they see as the most prudent approach to the bank loans asset class in 2023 and why.
Take credit: Our five best credit market ideas for 2023
Fixed Income Strategist Amar Reganti highlights credit market opportunities that he expects to arise over the course of 2023, against a backdrop of slowing growth.
US recession risk: No longer if, but when and how bad
Portfolio Managers Brij Khurana, Brian Garvey, and Nick Petrucelli believe many observers are underestimating the severity of a potential US recession this year.
LDI in 2023: Ten questions corporate plan sponsors are asking
Members of our LDI Team address a range of topics that US corporate plans will be thinking about in the coming year, from the investment implications of pension accounting changes to the role of alternatives in a return-seeking portfolio.
Picture this: Our 2023 economic forecast in five charts
We explain the shifts the market is undergoing, analyze the implications for different asset classes, and identify potential risks and opportunities in a series of visuals.
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This executive summary distills the points of view of several of our 2023 Outlook authors. Discover the risks and opportunities they see as we enter a new economic and market regime.
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Our high-yield bond portfolio managers have a guardedly optimistic outlook on the market and believe security selection will be key to benchmark-relative outperformance in 2023.
Monthly Market Snapshot: November 2022
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Fixed Income Portfolio Manager Martin Harvey and Investment Communications Manager Jitu Naidu consider the present state of and outlook for the US dollar.