Link para o artigo original : https://www.lordabbett.com/en-us/institutional-investor/themes/2023-investment-outlook/2023-investment-outlook–investment-grade.html
Higher yields have significantly improved the potential for income in the year ahead.
By Ty J. Kern, Gregory H. Benz, Riz Hussain
Key Points
- Overall disciplined issuer behavior has contributed to generally healthy corporate balance sheets and reduced debt levels.
- Yields that have not been reached in over a decade have substantially improved the entry point for investment-grade bonds.
- Although we believe corporate balance sheets are in a position to withstand an economic downturn, we think an up-in-quality approach will help to limit risks while seeking the attractive yields offered on investment-grade fixed income.
Market Setup
Over the past year, as the market was forced to cope with a U.S. Federal Reserve (Fed) that produced one of the fastest interest-rate hiking cycles in developed markets’ history, investment-grade corporate bonds had their worst total-return year ever, resulting in the ICE BofA U.S. Corporate Index retreating 15.4%. There were positives to the year 2022, however, as investment-grade corporates have remained disciplined in a post-pandemic world, strengthened their balance sheets, refinanced their debt at lower rates during 2020-21, and continued to cut their overall debt load. In stark contrast to the excesses seen in many cycles, the strength and discipline of many corporates shined, as rising stars outpaced fallen angels at the highest pace on record in 2022.
With yields on investment-grade corporate bonds historically high, it has also put the breakeven rate (the amount a bond’s yield can increase over the course of a year without losing money from a total-return perspective) to a decade-high as well. This creates an extraordinary asymmetry in the investor’s favor and will be a comfort for investment-grade corporate bond investors in 2023.
The landscape for high-quality fixed income looks much different than a year ago; the yields on investment-grade corporates ended 2022 higher than where the high yield market started the year; and we’re excited about the prospects for investment-grade bonds in 2023, as we put 2022 in the rearview mirror.
Positioning and Risk Stance
Heading into 2023, yields on investment-grade corporates are at their highest levels since coming out of the Global Financial Crisis, but the excess spread compared to U.S. Treasuries is just inside the long-term average of +145-150 basis points (bps). While corporate bond spreads are not reflecting a significant economic slowdown, the Fed and other global central banks are still hiking interest rates to combat inflation, while concurrently unwinding their balance sheets at an unprecedented level. We believe strong corporate balance sheets can withstand this scale of global quantitative tightening, but it is prudent for corporate bond investors to be positioned up in quality, up in liquidity, and down in cyclicality to balance the risk of an economic downturn and eliminate market tails.
At the sector level, we favor financials with strong capital positions, stable utilities, defensive healthcare, and energy, given the sector has returned to its defensive roots with conservative management and capital allocation. We do not feel that compensation is high enough to offset the risks of other highly cyclical and interest-rate exposed sectors (like real estate) at this time, especially considering the opportunities in other high-quality and durable blue-chip companies. Finally, with an inverted U.S. Treasury yield curve, we’re particularly enthusiastic about one- to three-year investment-grade corporates with a similar yield profile to 10-year or longer corporates.
About the Contributors
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