Key Takeaways:
- Corporate bonds are experiencing their worst month since last year.
- Goldman Sachs predicts positive returns despite spread widening.
- Experts suggest cautious positioning due to unattractive valuations.
What Happened?
Corporate bonds are facing a tough month, recording their worst performance since late last year. Spreads widened by about 10 basis points in June, as reported by a Bloomberg index. This shift comes after yield premiums on corporate bonds and US high-grade securities rose from May levels that were rarely seen since the 2008 financial crisis.
Goldman Sachs strategists, led by Lotfi Karoui, predict US high-grade spreads will settle at 90 basis points and junk spreads at 291 by year-end. However, current levels are 94 and 314 basis points, respectively.
Why It Matters?
You might wonder why these changes are significant. For investors, widened spreads often indicate less attractive credit investments compared to Treasuries. While some experts like Neeraj Seth of BlackRock believe this environment could still favor credit, others like Noah Wise from Allspring Global Investments are reducing exposure due to less attractive valuations.
This shift in strategy underscores a broader debate about the value of corporate debt in a fluctuating market. With the Federal Reserve likely to cut interest rates, corporate bonds could struggle to keep pace, making it essential to reassess your portfolio allocations.
What’s Next?
Looking ahead, Goldman Sachs remains optimistic, forecasting that both high-grade and high-yield bonds will outperform government notes this year. European junk securities may deliver 5% excess returns, while US equivalents could generate 3.7%. Despite this positive outlook, some experts advise caution.
Marvin Kwong of M&G Investments suggests focusing on shorter-dated bonds to manage risks better. Additionally, the Federal Reserve’s potential rate cuts could create opportunities in Treasuries or futures as yields decline. As you navigate these changes, keeping an eye on economic indicators and corporate fundamentals will be crucial for making informed investment decisions.
