High yield corporates. We are also monitoring the conditions of high yield corporates. We believe this asset class is marching towards late cycle phase, with financial conservatism fading and looming restructurings in parts of the commodity complex.
We continue to expect high yield to be a tale of two markets in 2016, between global commodity-related firms and those that are mostly exposed to the US, where the expected growth trajectory is slow but steady. Fundamental pressures in the commodity-related sectors will likely lead to higher default rates for the asset class, in our view, but the market is increasingly pricing in such a potential outcome. Outside of the commodity sectors, we maintain a more optimistic view of the high yield asset class given a relatively more positive fundamental outlook, albeit balanced by our expectations of higher volatility in the asset class triggered by expected changes in Fed policy.
Important information
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.
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
High yield bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of high yield bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.