To better understand the impact of potential macroeconomic scenarios on the asset class, we have undertaken a sensitivity analysis of the global investment grade corporate bond market. This sensitivity analysis points to one clear implication: the importance of investing in fixed income despite ongoing uncertainty. We believe fixed income, in particular credit markets, have become a much more attractive proposition for investors.
Despite interest rates being hiked to their highest level since the mid-2000s and a mini crisis in the US banking sector, the US and other developed market economies remain in relatively robust health, supported by a resilient consumer. A recession has so far been avoided, but the risk of one occurring has not gone away. For the US, the most likely scenarios are now either a soft landing in which recession is avoided but inflation remains above the 2% target, or the economy enters a recession and disinflation accelerates, providing the US Federal Reserve (Fed) with space to pivot.
Fixed income is well placed for this environment, with bonds poised to provide solid returns in most of the expected scenarios. We believe that the combination of high quality income and duration available within IG credit makes it the best area of the market to capture the opportunities now available. Although credit spreads for IG credit have tightened in recent months, dispersion has also increased. For active managers, this is a welcome development that increases the potential investment opportunities available.
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