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Falling Angels? Credit Market Risks and Opportunities

By Advisor Perspectives
Financial Services

SUMMARY

  • Variations across the U.S. credit market continue to offer high-conviction opportunities for active investment approaches, versus relying on generic beta exposure. We see opportunities in financials, high-quality taxable municipal bonds, agency mortgage-backed securities, and securitized products, which in our view offer better risk/reward profiles than most single-A corporates with relatively less downgrade risk.
  • Releveraging risk may often be higher with single-A companies than BBB companies, and we also note that rating agencies have a negative outlook on a significant number of U.S. single-A nonfinancial issuers. The high dispersion in risk profiles across single-A corporate names reiterates the importance of thorough bottom-up credit research.

U.S. corporate bond markets have transformed in the past few years as the proportion of BBB rated credit has swollen. There’s little room for error, as we noted back in January 2018. Where do we stand now? Many investors express justifiable concerns about the sheer size of the BBB market, but we believe the spotlight on BBBs has diverted attention from the risks in the smaller single-A market.

Read more at Advisor Perspectives.

Photo: Allan Ajifo

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