Mitigating fixed-income risks requires identifying potential vulnerabilities and actively fortifying a portfolio to withstand the end of the cycle.
“Risk-off” Comes with Unique Challenges
Timing the end of a prolonged recovery could prove tricky, likely leaving a jam-packed flight to safety ahead of the next downturn. Warning: it could be a bumpy ride. Passive fixed-income investing is paying you less for increased threats to your principal – including interest rate and credit risks.
Passive Fixed-income Indexing Could Cause Issues in the Future
Bloomberg. Barclays U.S. Aggregate Total Return Value Index Option Adjusted Duration (Duration), Barclays U.S. Aggregate Total Return Value Index (Bond Yield-to-Worst). % of BBB Credit also compiled from Barclays U.S. Aggregate Total Return Value Index. 12/31/08-12/31/18. Past performance is not indicative of future results. You cannot invest directly in an index. Data will be updated yearly.
Expand Your Portfolio Opportunities
As the cycle turns, a mix of Treasuries, munis, and corporate bonds may fall short. Reposition your portfolio by including harder-to-access credit opportunities.
Sitting at the top of the capital structure with less sensitivity to interest rate changes, bank loans may help minimize interest rate and default risks.
High Yield Bonds
Offering more attractive yields with a lower credit rating, high-yield bonds may help boost a diversified income strategy. High-yield spreads have remained attractive as default rates have fallen.
Income-producing, asset-backed equity and debt securities historically offer higher yields than more traditional mortgage-backed securities.
Business Development Companies
By filling a void in the financing marketplace, business development companies typically provide capital for small business growth initiatives in exchange for an attractive, fixed interest payment.
*These credit investments may offer higher yields than those of traditional fixed-income investments, including, butnot limited to, U.S. Treasuries, investment-grade U.S. corporate bonds, and U.S. municipal bonds. Investing in these asset classes may carry increased risks such as credit and liquidity risks. You cannot invest directly in an index. ** JP Morgan Markets. J.P. Morgan Leveraged Loan Index Market Cap. 9/30/19. *** Bloomberg. ICE Bank of America Merrill Lynch High Yield Master II Index Market Cap. 9/30/19. **** J.P. Morgan Markets. J.P. Morgan CLO Index Market Cap. 9/30/19. ***** Bloomberg. S&P BDC Index Market Cap. 9/30/19.
Strengthen a Diversified Income Strategy
A portfolio’s “retreat to safety” requires an assessment of risk. What is more risky than missing out on the income you need?
Bloomberg. ICE Bank of America Merrill Lynch U.S. Treasury Index (U.S. Treasuries), ICE Bank of America U.S. Municipal Securities Index (U.S. Municipal Bonds), Barclays U.S. Aggregate Total Return Value Index (U.S. Corporate Bonds), J.P. Morgan CLOIE Post-Crisis BB Composite Yield (Asset-backed Securities), S&P/LSTA Leveraged Loan Index Interest Index (Senior Secured Loans), ICE Bank of America Merrill Lynch High Yield Index (U.S. High-yield Bonds). As of 9/30/19. Past performance is not indicative of future results. You cannot invest directly in an index.
** U.S. municipal bond, corporate bond, and high yield bond yields are a yield to worst – an estimate of the lowest yield on a bond when holding to maturity. It is a measure that is used in place of yield to maturity with callable bonds, which can be bought back before their stated maturity date. Knowing a bond’s yield to worst is important when comparing one investment to another and allows you to make a comparison of bonds with varying call features and coupon payments.
Loans Are Less Sensitive to Interest Rates
Bloomberg. S&P/LSTA Leveraged Loan Index Interest Index (Senior Secured Loans) Barclays U.S. Aggregate Total Return Value Index Option Adjusted Duration (U.S. Corporate Bonds). 9/30/19. Past performance is not indicative of future results. You cannot invest directly in an index.
Avoiding a Bet on Future Interest Rates
Senior secured loans typically reset to LIBOR every three months, limiting duration in a fixed-income portfolio. The higher the duration – the greater the impact when market rates move up or down.
J.P. Morgan. 2018 High-Yield Annual Review. 12/20/18. Past performance is not indicative of future results. You cannot invest directly in an index. Latest information available.
Assessing Late-cycle Credit Risk
Despite a spread to corporate bonds that would indicate higher credit risk, high yield bonds and senior loans have experienced lower defaults since the Great Recession. Forecasts expect below-average defaults to continue.
The information contained herein is intended to be used for educational purposes only and does not constitute an offer to sell or a solicitation to purchase securities. Such offers or solicitations can only be made by means of a prospectus. Prior to making any investment decision, you should read the applicable prospectus carefully and consider the risks, charges, expenses and other important information described therein. The value of your investments may decline, and you could lose some or all of your investment. The prospectus can be obtained by contacting your financial advisor or by visiting our website at www.ResourceAlts.com.
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