Managers Tiptoeing Toward the Exits in Corporates
These funds are in position for a credit sell-off.
For intermediate-term bond funds, a healthy allocation to credit has been a boon to recent performance. The Bloomberg Barclays Investment-Grade Corporate Index gained 6.3% annualized, in 2016 and 2017, while the Bloomberg Barclays High-Yield Index generated an explosive 12.2% annualized during the same period. Compared with the far more modest 3.1% of the broad Bloomberg Barclays U.S. Aggregate Bond Index, exposure to credit was a discernable performance advantage.
Today, managers are worrying that the credit party is about to end. The markets are starting to become more volatile as some head for the exits. In January 2018, the payoff for taking credit risk reached very low levels so that managers felt there was little reward to taking credit risk. The average option-adjusted spread of the Bloomberg Barclays Corporate Investment Grade Index, a measure of the yield premium earned over a comparable U.S. Treasury, tightened to 85 basis points by January, a level that was last seen in 2007. S&P estimates that the number of highly leveraged corporates has grown to 37%, which is 5 percentage points higher than prior to the financial crisis. Yet default rates remain low. Add to this situation more-positive economic indicators and a Federal Reserve that responds by raising interest rates at its fastest clip in a decade, and there are plausible reasons for portfolio managers to question the endurance of this credit rally.
Emory Zink does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.