asset allocation | july 24, 2020
Four Reasons Credit is Attractive Now
In this environment, we can outline four reasons why a reallocation from stocks to credit securities could benefit a broadly diversified portfolio.
Head of Global Multi-Asset
Cheap valuations relative to stocks and the search for yield and income should favor corporate debt issues, including high yield bonds.
Credit markets are buoyed by support from 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.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
The views contained herein are those of the authors as of June 2020 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.
Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.
Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. Fixed-income securities are subject to credit risk, liquidity risk, call risk, and interest-rate risk. As interest rates rise, bond prices generally fall. Investments in high-yield bonds involve greater risk of price volatility, illiquidity, and default than higher-rated debt securities. Diversification cannot assure a profit or protect against loss in a declining market. Actual outcomes may differ from any forward-looking statements made. All charts and tables are shown for illustrative purposes only.
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