View on Credit

AS OF 23 AUGUST 2016


Investment grade

High yield

Emerging markets

Income is very much at the core of our multi-asset portfolios, and we believe that high quality spreads are a good way to escape negative-yielding assets without taking excessive risk at a time when we believe recession probabilities are still fairly low.

In particular, we believe investment grade corporate bonds compensate investors well relative to liquidity risks and expected default rates going forward. From 1983–2015, cumulative defaults over any five-year period averaged 1.2% (according to Moody’s), accounting for the current ratings distribution in the investment grade universe. Demand for these securities should be supported by the large pool of negative-yielding government bonds and purchases of corporate bonds by the European Central Bank, which started last month at a robust pace, to which we should add upcoming purchases by the Bank of England as well.

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Bullish on Credit

A unique alignment of fundamentals, technicals and valuations has led to a one in six year opportunity in corporate credit.

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A Word About Risk: 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 the current low interest rate environment increases this risk. Current 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. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Equities may decline in value due to both real and perceived general market, economic, and industry conditions.

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 suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.