- In short-dated (one- to three-year maturity) U.S. investment grade (IG) credit, supportive technical factors have combined with fundamental strength to create attractively priced entry points.
- Short-dated IG bonds have historically tended to offer more stable returns and lower volatility than full-maturity corporate bonds, as well as lower actual default risk. They also tend to be less sensitive to interest rates.
- Active credit research, including thoughtful, rigorous analysis of individual issuers and securities, is critical. This remains an environment for selectivity in credit.
Corporate credit is a market where we believe investors should be selective and exercise caution as the global economy reaches the later stages of a long expansion. Within the broader credit sector, however, we find pockets of value – particularly among short-dated (one- to three-year maturity) U.S. investment grade corporate bonds, where technical factors have combined with fundamental strength this year to create attractively priced opportunities.
One reason we see value now is the relative underperformance. U.S. IG corporate bonds overall have underperformed both high yield bonds and equities year-to-date on a beta-adjusted basis (as of 30 June 2018, as proxied by the Bloomberg Barclays U.S. Aggregate Credit Average OAS (Option-Adjusted Spread) Index, the Bloomberg Barclays U.S. Corporate High Yield Average OAS Index and the S&P 500, respectively).
Further, relative to full maturity IG credit, short-dated IG credit spreads over like-maturity U.S. Treasuries have widened in a similar magnitude as full maturity credit since the beginning of 2017, while offering a lower risk profile and thus underperforming on a beta-adjusted basis (see Figure 1).
In addition, the front end (one- to three-year) of the IG credit index has underperformed the full IG index from a yield perspective (see Figure 2), primarily due to selling by non-U.S. holders as the costs of currency hedging have risen. We believe these trends point to an attractive relative value for short-dated IG credit today.