The silver lining in all of this is that the US IG market is enforcing some discipline on issuers by demanding higher yields and wider spreads in order to get new bond deals done. Valuations in the US IG market are becoming quite attractive relative to other fixed income asset classes, and we suspect an opportunity will likely present itself in the medium term to take a more positive view on IG credit spreads and increase our allocations accordingly.
As long as the majority of M&A deals remain strategic in nature and companies follow through on commitments to de-leverage after the deals close and maintain investment grade ratings, we are likely to be in store for a longer-than-average credit cycle. We are watching for a normalization in the supply/demand imbalance that has persisted so far in 2015 through some combination of a slowdown in supply and/or an increase in demand for US IG.
1 Sources: Invesco, Bloomberg L.P., July 31, 2015.
2 Sources: Bloomberg L. P., Invesco, August 17, 2015.
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Important information
A basis point is one hundredth of a percentage point.
Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
This article was written by Jacob Habibi, a Senior Credit Analyst at Invesco Fixed Income.