Taking What the Market Gives Us: Credit Risk Becoming Compelling

For the first time in a long while, we are becoming constructive on the corporate credit market. Due in part to the amplified level of market volatility we’ve seen during the early part of 2016, credit spreads, which represent the level of risk investors assign to corporate bonds, have widened considerably and stand at levels consistent with a recessionary environment. Looking at the situation another way, investment grade spreads have reached levels that we haven’t seen since 2011 (during the European Sovereign Debt Crisis) and are more than double the levels we saw last summer. While volatility could persist, we expect the U.S. economy to escape recession and continue growing. This should help U.S.-centric companies, like banks, certain REITs, telecom companies and select technology firms, continue improving their top and bottom lines and produce plenty of cash flow to comfortably cover their debt service obligations. Giving us additional comfort in adding to corporate exposure is the protection that corporate bonds now have from wider spreads in the form of higher yields. The higher yields that corporates offer should help them outperform other sectors of the investment grade market, even if market volatility persists. To make a long story short, volatility typically presents opportunities that can add value for years into the future. We feel confident that this is one of those times.

Source: Barclays