For those of us who follow the markets closely, this dynamic is typical of the late stages of a credit cycle after fundamentals have peaked and begin declining. There’s plenty of evidence to support this view. In 2015 the par value of corporate issuance was the highest on record. Many companies issued debt to fund stock buybacks. S&P 500 earnings have been declining, quarter-over-quarter. There has also been a pick-up in mergers and acquisitions as corporate managers look to add shareholder value. This combination of factors has undoubtedly created huge concern for bond holders.
In our view, fixed income investors will need to be increasingly selective in 2016. That means choosing more carefully which issuers, sectors, maturities and credit qualities they own. We believe there’s still opportunity to earn decent returns and income. This is certainly true if credit spreads stabilize in 2016, and may even be the case if spreads continue to widen.
Anthony Parish is the Vice President of Portfolio Strategy & Research at Sage Advisory, a participant in the ETF Strategist Channel.
Credit spreads reflect Bank of America Merrill Lynch US Corporate Credit Indices. Source: BOA Merrill Lynch, as of 1/19/2016
High yield sector weightings reflect Barclays US High Yield Index. Source: Barclays Capital, as of 1/19/2016
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