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

 

Footnotes
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
 Disclosures
Sage Advisory Services, Ltd. Co. (Sage, we, our and us) is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. The information included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. No part of this Material may be produced in any form, or referred to in any other publication, without our express written permission. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

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