Maintain slightly below-average risk profile, above-average liquidity
While the deteriorating macroeconomic backdrop and challenging liquidity conditions appear to paint a dire picture for corporate bonds, I believe the bearishness is tempered somewhat by relatively attractive valuations, still-strong fundamentals, and a lack of imbalances compared to past credit cycles.
I acknowledge that monetary policy indicators, which have historically been a reliable predictor of credit market returns, look quite poor these days. Moreover, current credit spread levels, which are wide versus their historical medians across most fixed income sectors, already seem to reflect an impending slowdown in global economic activity. On a more upbeat note, corporate balance sheets appear very healthy to me overall, while many of the weaker individual credits in the market already defaulted during the early stages of the COVID pandemic.
Again, I believe many investors may be well served by building portfolio positions around various dislocations in higher-yielding credit markets, with a goal of pursuing yield and total return in as efficient and risk-aware a manner as possible. I also think it is important for investors to stay flexible and nimble with their portfolio allocations in an uncertain market landscape. Among other things, that might mean having sizable allocations to cash and liquid, developed market government bonds to be able to capitalize on market opportunities as they arise.
Monthly Market Review — August 2024
A monthly update on equity, fixed income, currency, and commodity markets.
By
Brett Hinds
Jameson Dunn