- The US Federal Reserve’s aggressive response to the coronavirus has driven yields on safe-haven debt to near zero, leaving “low-risk” portfolios increasingly susceptible to interest rate-driven price volatility.
- The Fed’s efforts to depress high-quality government yields creates a powerful source of demand for credit assets by forcing investors further out on the risk spectrum to generate income. This demand, coupled with the prospect of continued economic growth, supports a broadly positive outlook for credit assets.
- Following a significant rally that saw prices recover 20% or more, risk compensation is currently below the long-term average across most fixed income sectors. Relative value relationships also appear fair, suggesting that a diversified approach to sector allocation may yield better risk-adjusted results than a narrow focus.
- We see an opportunity to diversify credit risk across corporate, consumer and sovereign balance sheets, which have all experienced fundamental repair since the depths of the crisis.
- Our base case is that the economy continues to recover through 2021, though with greater differentiation between the pandemic economy’s winners and losers. Changing demand patterns and prospects for an uneven recovery will impact industries and issuers in dramatically different ways.
- Good credit research that identifies which trends are most likely to persist should be viewed as an indispensable tool in today’s lower return world. Credit selection may prove to be the most valuable risk management tool in fixed income in 2021.
The US Federal Reserve’s aggressive response to the coronavirus pandemic has driven yields on safe-haven debt to near zero, leaving “low-risk” portfolios increasingly susceptible to interest rate-driven price volatility.