Beyond Investment Grade Bonds

Interest rates and government bond yields are attractively high—but so is the risk. Credit risk is relatively low—but credit spreads are generally tight and relatively unattractive. In this environment, we think most investors can benefit from expanding the horizons of their fixed income universe. Those who mainly hold government bonds can benefit from expanding into credit sectors, and those who mainly hold investment grade can benefit from expanding into high yield and other credit markets—especially if their objective is to add income rather than ballast to portfolios. They will receive the same elevated yields, with a moderate additional credit spread, but given the current relative debt burdens of the government and corporate sectors, this need not imply greatly increased risk or volatility.

In our view, bringing these sectors together into a single mandate or vehicle has advantages, enabling an integrated approach to assessing relative value, and the ability to move nimbly among them.