Navigating the Changing Landscape of Fixed Income Investing
The landscape of fixed income investing has drastically changed in the wake of the pandemic, with a historic string of central bank rate hikes leading to 86% of global fixed income assets now yielding 4% or more. This shift has provided long-term investors with the opportunity to generate solid income without the need to take on extra risk.
U.S. companies have shown resilience to higher rates, with U.S. investment grade companies having less than 10% of outstanding debt coming due annually through 2030. Many companies took advantage of low rates early in the pandemic, converting short-term debt to long-term, resulting in a significant decrease in U.S. corporate net interest payments even after sharp rate hikes.
While the total income on offer in fixed income is attractive, investors are advised to stay selective in credit. Spreads have tightened due to strong demand relative to supply and resilient corporate balance sheets. U.S. investment grade companies are currently experiencing some of the tightest spreads in two decades.
In terms of credit preferences, short- and intermediate-term bonds are favored for their income potential, while high yield credit is viewed as more attractive on a total return basis relative to investment grade. European longer-term credit is preferred over U.S. credit due to relatively wider spreads.
Looking towards equities, the preference is to take on risk in stocks over credit on a tactical horizon of six to 12 months, with an overweight position in stocks and the AI theme. On a strategic horizon of five years and longer, private credit is favored over public credit, despite rising U.S. direct lending default rates.
In conclusion, the current fixed income environment offers opportunities for investors to generate solid income, particularly in certain credit pockets. While equities are preferred for taking on risk in the short term, private credit is seen as a promising option for the future of finance. Ultimately, the fastest rate hikes in decades have reshaped the fixed income landscape, presenting investors with a range of opportunities to consider.
