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Fixed Income

Looking for Value in the Fixed Income Space

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US Investment Grade (IG) Corporate Bonds

In late December 2018, US IG corporate spreads widened to their highest levels since June 2016. Markets have since adjusted, as benchmark spreads have moved back in-line with their long-term average of 130bp. However, index yields remain elevated at 4.1%, near their highest levels in 8 years and well above their global IG counterparts.

 

In Citi’s view, US banks are well capitalized and technology companies continue to benefit from the repatriation of large overseas profits. Additionally, management from numerous sectors (i.e., telecom) appear more focused on decreasing leverage and growing earnings. Citi analysts continue to favor telecom and financials.

 

 

US High Yield (HY) Bonds

HY markets have had their fastest start in 10 years, and their second largest January on record. Though there is little signs of fundamental deterioration, it is hard to expect this pace of performance to continue. Spreads have fallen back below historical averages, and again look relatively expensive. While further improvements in equity markets can have a continued positive impact on HY returns, volatility likely remains elevated.

 

Nevertheless, yields near 7.0% still offers solid cash flow. Indeed, coupon could play a large role in US HY performance for 2019. Debt maturities are minimal this year, and do not become concerning until 2021. Default rates also remain well below average, currently at 2.4%.

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