What Are Today’s Opportunities and Risks in Fixed Income Credit Markets?
- Higher yields for corporate bonds generally correspond to higher credit risk based on an issuer's credit rating.
- We believe higher yields also offer opportunities for fixed income investors to add additional sources of income return to their portfolio by identifying bonds that have been mispriced.
- We see skilled active managers as uniquely equipped to help fixed income investors benefit from higher yields while minimizing potential downside risks.
Fixed income credit markets play a vital role in enabling issuers to access capital while offering investors the opportunity to earn excess returns by taking on additional risk. Treasury bonds provide investors with yields based on prevailing interest rates, but corporate bonds may carry an additional premium based on the issuer's creditworthiness, among other factors. Higher yields for corporate bonds generally correspond to higher credit risk based on an issuer's credit rating.
While 2022 was a challenging year for fixed income markets that resulted in credit spreads increasing significantly, particularly for high-yield issuers, higher yields have offered investors additional sources of income return and a higher cushion to protect from price declines from rising interest rates. The spread increase over Treasuries was due to various factors, including the U.S. Federal Reserve (Fed)'s aggressive interest rate hikes, fears of persistent inflation and a global growth slowdown, pressure on corporate balance sheets, and tightening banking and lending standards.
Source: Barclay's data; Bloomberg U.S. Credit Index, Bloomberg High Yield Bond Index, based on option-adjusted spreads.
What opportunities do higher yields present?
When credit spreads widen, it can signal that investors are demanding higher premiums for accepting higher risk. However, higher yields also offer opportunities for fixed income investors to add additional sources of income return to their portfolio by identifying bonds that have been mispriced based on perceived risks despite strong fundamentals at the issuer level.