Higher Yields Offer Credit Investors Attractive Return Potential
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Text on screen: Mohit Mittal, CIO Core Strategies
Mittal: The era where everyone is a winner is over.
Text on screen: In a challenging year, credit markets not immune to volatility
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2022 has been a challenging year for better returns across most markets, including fixed income and equities. Credit markets are not immune to that market volatility.
While the trailing 12-month returns look horrible, on a forward-looking basis,
FULL PAGE GRAPHIC: TITLE – Higher-quality yields look more attractive today. The bar chart shows the yield to worst for core bonds and investment-grade credit, which more than doubled from their December 2021 levels. Core bonds show a yield of 5.0% as of October 31, 2022 from 1.7% last December, while Investment Grade Credit shows a yield of 6.0% as of Oct. 31 versus 1.9% last December. Yield to worst measures the lowest of all possible yields resulting from the most adverse set of circumstances, from the investor’s point of view.
the current yields are the most exciting that I have seen in a really long time.
Higher-quality fixed income like investment grade looks quite attractive in the absolute sense, but also relative to equities, where downside could be much higher and volatility much, much higher.
Text on screen: TITLE – Long-term outlook for credit markets: BULLETS – Higher dispersion, Focus on company fundamentals, Focus on valuation metrics for credit selection
We think the next few years will be characterized by higher dispersion, increased focus on company fundamentals, and robust valuation methods to pick winners and losers rather than relying on central bank policy to lift all boats, including the leaky ones.
We are incredibly excited about the opportunities for active fixed income. Focus on company fundamentals -- supply chains, cost, and interest expense -- will be key to identifying solid credits in this environment.
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Disclaimer
Past performance is not a guarantee or a reliable indicator of future results.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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