Thanks to massive amounts of government stimulus and the Federal Reserve’s asset-buying programs, stability is back in credit markets. With that, there’s an opportunity for active managers to add value for investors, particularly against a low-yield backdrop.
Fortunately, analysts see credit stability remaining in place over the near- to medium-term. Declining default rates and a rising number of fallen angel issuers positioned to regain investment-grade status underscore the allure of credit markets today.
“We have seen a return to credit stability during the first two quarters, and we expect that to continue for the remainder of the year,” notes S&P Global Ratings. “The rating distribution remains strong and negative outlooks represent about 6% of total ratings compared to about 8% last year at this time.”
In the first half of 2021, active fixed income managers performed admirably, beating benchmarks across the fixed income landscape, with emerging markets debt being the exception. Conversely, active equity managers weren’t nearly as impressive as their bond counterparts.
A Looming Specter
That’s one reason investors may want to consider active management with fixed income as 2021 moves along. Another is the still looming specter of the coronavirus pandemic.
“Despite these generally positive trends, challenges remain as the pace of vaccination has slowed and COVID variants have accelerated in the U.S. and globally. The recent rise of the delta variant again highlights the regional variations and uneven health outcomes we have observed throughout the pandemic,” according to S&P Global.
Supporting the credit outlook is S&P recession outlook, which runs at 10% to 15% – the lowest level in six years.
That’s positive, but economic growth and low recession could give the Federal Reserve latitude to accelerate its interest rate hike timeline – something plenty of market observers are already discussing. That remains to be seen, but what isn’t up for debate is that more Fed governors are comfortable with moving closer to rate hikes,
For its part, S&P sees the first rate hike coming in the first quarter of 2023, followed by another in the third quarter of that year and another two in 2024.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.