In a world of compressed spreads and geopolitical crosscurrents, selectivity within below-investment-grade credit has never mattered more.
Key takeaways
- A resilient macro backdrop – steady U.S. growth, moderating yet still elevated inflation and synchronized global expansion – supports selective credit positioning today.
- While conflict in the Middle East has increased the price of oil, fueling inflation and slowing growth, the overall expected economic impact is modest.
- The high yield market’s structural quality improvement provides compelling value relative to default risk, and sufficient liquidity offers active managers additional return potential.
- Senior loans offer attractive yield potential, and wide price dispersion creates compelling total return opportunities for active managers over passive beta exposure.
- Preferred securities – 85% issued by regulated banks, insurers and utilities – could offer quality and tax-efficient income as a complement to high yield and loans.
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Endnotes
This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.
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Important information on risk
Investing involves risk; principal loss is possible. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, derivatives risk, dollar roll transaction risk and income risk. As interest rates rise, bond prices fall. Below investment grade or high yield debt securities are subject to liquidity risk and heightened credit risk. Senior loans are subject to loan settlement risk due to the lack of established settlement standards or remedies for failure to settle. These investments are subject to credit risk and potentially limited liquidity, as well as interest rate risk, currency risk, prepayment and extension risk, and inflation risk. Preferred securities are subordinated to bonds and other debt instruments in a company’s capital structure and therefore are subject to greater credit risk. Foreign investments involve additional risks, including currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. Investors should contact a tax professional regarding the appropriateness of tax-exempt investments in their portfolio. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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