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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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Brett Hinds
Jameson Dunn