First Quarter 2021
Here are the key takeaways from our latest Fixed-Income Outlook report:
- Additional fiscal stimulus, healthy consumer balance sheets, and accommodative Fed policy have created a constructive macroeconomic backdrop for risk assets.
- As investment-grade corporate spreads currently sit near decade tights, and with much good news priced in, we expect credit spreads to trade in a narrow range.
- High yield corporates, which experienced greater credit stress from COVID-driven shutdowns, should continue to benefit as the economy reopens.
- Within structured credit, we have found compelling risk-adjusted profiles in financial ABS, aircraft sale-leaseback transactions, and subordinated CLO debt investments.
- As the virus continues to infect commercial real estate, we are closely monitoring COVID-19’s impact on cash flows and resulting effects on property values in 2021.
- As long-term yields have reached the value zone, a market or overweight position may very well prove to be the low-risk choice.
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Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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