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Fixed Income—In Depth

A deeper analysis of investment trends and topics across asset classes and global markets.

March 4, 2021

Luis Alvarado, Investment Strategy Analyst

The corporate borrowing boom — no end in sight

Key takeaways

  • We are now in a new post-pandemic economic expansion and economic growth has plenty to recover, which is why we believe that credit growth still remains below levels that could signal a near-term credit cycle bust.
  • We believe that the low-interest-rate environment we are currently in, coupled with the ample liquidity in the system, will allow credit spreads to decline even further. Because we are in the early stages of a new cycle, spreads appear to be reflective of optimistic credit market sentiment.
  • In our opinion, the risks in credit markets currently remain moderate; however, we believe they can escalate quickly if liquidity begins to dry up or if corporate profits struggle to increase. This is one of the main reasons why we recommend investors remain selective regarding the credit quality, duration (measure of interest rate sensitivity), and income potential of their portfolios.
  • We believe fixed income will continue to play a crucial role inside diversified portfolios. Higher market volatility is expected, and bonds have proven to be resilient in times of unexpected crisis while providing income capabilities. We anticipate that investment-grade and high-yield bond returns should remain positive during our tactical time frame, although they likely will be less than the expected returns of equities. We recommend being selective and using active management, particularly in sectors where firms display higher leverage, are more prone to credit downgrades, or have a higher probability of distress, as we continue to navigate through the new post-pandemic recovery.