Thanks to ultra-accommodative monetary policy, a fiscal policy that is fueling economic recovery and improving economic data, credit markets are up to investors this year.
However, credit spreads – the yield premium that investors receive for adopting corporate bonds over Treasuries – are tight. In some market environments this can be of concern, but investors can guard against tough times with active management. In addition, some professional investors believe that exposure to the credit market is always justified.
“Allocations to credit markets still make sense, but we believe that some caution and greater selectivity are warranted given the tightening of spreads,” according to the study by T. Rowe Price.
Investors new to the concept of credit spreads and the resulting premiums can get up to speed by focusing on three aspects: credit quality, liquidity, and broader market risk. One way to look at these characteristics is that there are times when the liquidity of the credit market may be weakened, which could weigh on corporate debt. Likewise, there are environments where credit quality is a primary factor – sometimes more speculative debt is in favor. Finally, there are other times when investors should look to higher quality rates. For now at least, it seems that there is stability for two of these three factors.
“Given the extraordinary amount of ongoing monetary and fiscal policy support, one could argue that the liquidity and credit components are likely to remain stable or may even compress a bit more from here on,” adds T. Rowe Price. .
In a still fluid environment, investors may want to adopt active management, especially if they are concerned about spread compression. While there have been noticeable positive winds at the back of the credit market, fundamentals in general are languishing a bit due to industry consolidation and spending on rewards for shareholders.
Another benefit of active management in this environment is that it can put investors in front of superior credit, strong fundamentals and industry opportunities.
“We have a preference for shorter maturities, greater liquidity and credits dislocated from fundamentals. In particular, we favor bonds from sectors that suffered during the pandemic and could potentially be the main beneficiaries of the recovery of economies, such as the banking sector, ”notes T. Rowe Price.
The company recently filed plans for the T. Rowe Price Total Return ETF, the T. Rowe Price QM US Bond ETF and the T. Rowe Price Ultra-Short Term Bond ETF.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not come to fruition. The information on this site should not be used or interpreted as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.