Numerous managers that we cover have expressed difficulty finding bonds with attractive valuations. With the exception of a few market sell-offs in recent years that made prices more attractive for a bit, that’s an issue that has become more and more pronounced as investors have snapped up bonds with attractive yields, driving up their prices. After backing up during the 18 months prior to 2016, for example, yield premiums (as measured by option-adjusted spreads) for bonds in the Bloomberg Barclays Investment Grade Corporate Index have since ground down to an average of less than 90 basis points at the end of 2017, from nearly double that level a year earlier. That’s especially notable given that the index’s last flirtation with a figure that modest was in February 2007, at the leading edge of the financial crisis.
And not unlike the later years of previous credit cycles, fund managers have also taken note of deterioration in the standards that corporate borrowers are being held to when setting the terms of their bonds and loans. That often means bank loans pledged with the security of second liens, in contrast to the most secured status leveraged bank loans normally carry.
Eric Jacobson does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.