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Intermediate-Term Bond Managers Are Increasingly Cautious on Corporates

Valuations and a surge in BBB rated issuance are giving managers pause.

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Corporate bonds were a definite bright spot for investors in 2016 and 2017 as they came off lows hit in February 2016. Investment-grade corporates in the Bloomberg Barclays U.S. Aggregate Bond Index outpaced the broad index sharply in 2016 and 2017 before suffering meaningful losses in 2018, thanks in part to the prevalence of long-maturity debt in the sector and an increase in the yield required by investors to hold investment-grade corporate debt. High-yield bonds, meanwhile, were strong performers in 2016 and 2017 and have held up relatively well for the year to date despite some weakness this fall.

On the surface, economic conditions would look to bode well for corporate bonds. Growth has been healthy and inflation contained. Few managers see risks that would lead to a near-term recession, even though the economy is in the 10th year of an expansion. Rather, they point to the fiscal boost from 2017's tax cuts, which continues to work its way through the economy, supporting already-strong earnings growth.

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Sarah Bush has a position in the following securities mentioned above: PTTRX. Find out about Morningstar’s editorial policies.