We see four reasons why the credit sector appears attractive in this environment. Specifically, their cheap valuations relative to stocks; the search for yield should favor corporate debt issues, including high yield bonds; credit markets are supported by the Fed; and indiscriminate selling has created compelling opportunities for active management.
In the current market environment, we see an opportunity to move some money from stocks into credit—corporate bonds, including high yield bonds. This, in the context of a broadly diversified portfolio.
So, let me give four reasons why we think credit is attractive in the current environment.
High yield bonds are cheap relative to stocks at the moment. If you look historically, they’ve only been this cheap relative to stocks about 15 to 20% of the time over the last 30 years.
With increased government debt, we can expect that coming out of this crisis, we’ll be in an even lower interest rate environment, with low inflation and low growth in general. This means that investors will continue to search for income, search for yield, and this will favor corporate bonds, such as high yield bonds.
We expect continued support from the Fed, and as we all know, it never pays off to fight the Fed. This means there will be support for credit markets over the next six to 18 months. Because the asset class in high yield has sold off as a whole, there are opportunities to buy the debt of companies that have strong balance sheets and that will get through this difficult patch in the economy. So, lots of opportunities for active management.
So, these are the four reasons why credit is attractive at the moment—favorable valuations; continued search for yield as we come out of this crisis; support from the Fed; and opportunities for active management.
Morningstar Awards 2020©. Morningstar, Inc. All Rights Reserved. Awarded to T. Rowe Price for 2020 U.S. Morningstar Exemplary Stewardship and to Jerome Clark for 2020 U.S. Morningstar Outstanding Portfolio Manager, U.S.A.