On the credit side, spreads on high-yield bonds are relatively low, but all-in yields are still above long-term averages. The starting point of yield to worst has historically been a good indicator of subsequent returns for high-yield bonds. Some spread widening is likely, but a strong backdrop seems to provide a sturdy foundation. When spreads have widened in the past, it’s largely been in the CCC-rated space.
Beyond US high yield, other sectors we find attractive include US investment-grade bonds, emerging-market (EM) corporate and EM high-yield bonds denominated in US dollars, and select securitized bonds. As always, investors need to apply their due diligence, zeroing in on the most compelling potential from a risk/reward perspective.
Municipal Bonds: Opportunity…but Not from the Sidelines
The tax-exempt side of the story featured a strong third quarter, as accelerating investor demand continues to help offset record new issuance. From our perspective, a barbell maturity structure has provided a better cushion for portfolios and offers investors a higher yield going forward.
Municipal credit has outperformed because of robust demand, with tightening credit spreads bolstering returns. Credit fundamentals, based on our assessment, remain resilient, with strong liquidity positions giving issuers the flexibility to weather an expected US economic slowdown.
Right now, we see a sizable opportunity for investors to move off the sidelines and into the municipal bond market. Tax-equivalent yields in the muni market are higher (Display) and cash rates have declined with rate cuts. More rate declines are expected, so there could be a benefit from adding duration to portfolio exposure.
