January 2022 / VIDEO
Strong Fundamentals, Demand Drive Investment-Grade Corporates
- We believe investment-grade corporates can offer attractive additional yield and relatively low volatility versus higher-quality government bond segments.
- Corporate fundamentals continue to improve, helping to drive underappreciated opportunities in investment-grade corporate bonds.
- Investment-grade corporate market technicals have been more supportive than expected, with stable new issuance and strong demand from outside the U.S.
Investors’ search for yield and income continues. We believe investment-grade corporate bonds have a role to play by potentially offering attractive additional yield and relatively low volatility versus higher-quality government bond segments.
We recognize that valuations are elevated; however, as we look into 2022, we believe there are two key drivers that may be underappreciated providing opportunities in investment-grade corporates.
The first key driver is that corporate fundamentals continue to improve.
Corporate leverage has fallen as issuer profits have recovered.
Corporate debt loads have also started to decrease on a year-over-year view after a large jump in 2020 as issuers sold new bonds. This is further lowering leverage.
Credit rating agencies are responding to the improving fundamentals with more upgrades. Beginning in the second quarter of 2021, the number of upgrades within the U.S. investment-grade corporate sector has been greater than the number of downgrades. We see this trend continuing into 2022.
The second key driver is that market technicals have been more supportive than expected.
In terms of supply, we expect new bond issuance supply to be reasonably stable in 2022, which is a positive versus the large increases experienced in 2020.
Less well understood is the demand side for investment-grade corporates. Buyers outside the U.S. have been drawn to the market by the attractive yields after converting into their local currency. This is particularly true relative to the still-negative yields on many high-quality non-U.S. government bonds.
So how and where do we find value and express our views? We see potential value in industries including banks and communications. We favor intermediate maturities over longer-term bonds because of their better historical risk-adjusted returns.
We also have a Fed that is removing policy accommodation. Historically, credit spreads have typically tightened at the beginning of a Fed hiking cycle, which is an encouraging sign for 2022. It is usually later in this cycle where credit spreads widen, so that is something we are taking into consideration for 2023.
We expect the supportive technical and fundamental trends to continue well into early 2022. As a result, we believe investment-grade corporates may provide a solid investment choice.
This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.
It is not intended for distribution to retail investors in any jurisdiction.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.