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By Kevin Akioka - February 1, 2019
We've heard a lot about volatility over the past two quarters. Frankly, I don't see that changing anytime soon—but that's not necessarily a bad thing. Volatility presents corporate credit investors with several yield prospects. The key will be selectivity.
This late in the credit cycle, profits and cash flow tend to slow down. That underscores the need to be much more careful in how we look at industries and individual companies. For 2019, I'm optimistic about the ability to find some attractively valued securities in several sectors.
In this quarter's outlook video, below, I dive into exactly where we might see good value across the fixed income sectors in 2019.
In 2019, we expect much more volatility. But with volatility comes opportunity, and we're going to be looking at different sectors of the market for those yield opportunities.
2018, what we saw is a realization that we are late in the credit cycle. Because we're late in the credit cycle, you see things like profits and cash flow really start to slow down. You also see some re-leveraging occurring in a lot of different industries. Because of that, you need to be much more selective. So, going forward, our M.O. is to really be very selective from a bottom up standpoint, but also from a sector standpoint as well.
When it comes to rising rates, there's a couple ways it's going to impact the corporate market. From a corporate company standpoint, rising rates impact funding costs, and that could be a negative. It will be a drag on cashflow and a drag on profitability, but for the most part, if the rate rise is moderate, it's not really going to hinder companies in a big way. From an investment standpoint, looking at corporate bonds versus other sectors, it actually could be a positive. Maybe you have a little bit of wider spreads, you have some higher yields, you're getting compensated for the risk a lot more. So, you still need to be selective in where you're putting your money, but it's not really something to fear in a big way.
Income solutions are a big priority for investors, and the way we manage our income products is that we look for higher yielding bonds. We have a very big opportunity set. We want to go where there is yield and income in the markets. And for right now, even though there's a lot of volatility, there are spaces in the market that are attractive. Some of the corporate bonds that are shorter along the curve are still attractive, some high yield sectors are still attractive, and we're starting to look at emerging markets as well. So, there's different pockets within those countries that could be potential good income opportunities for us.
Well, we're optimistic about certain sectors of the market. I think by and large, we're going to be a little more careful about our security selection, but as we see different parts of the market become cheaper, one of the things that's risen in 2018 was volatility, and with volatility comes opportunities in different sectors. And so, we're optimistic that we are going to be able to find some good value, good yielding securities in a lot of different sectors.
One of the things we're concerned about in 2019 is that there is going to be a lot more dispersion in industry results across different sectors. So, we are going to be much more careful in how we look at industries and individual companies. Because we are late in the cycle, you tend to get different kind of profitability metrics for different type of industries, and we're going to have to be really careful about how we invest across the spectrum.
Negative-yielding debt has been steadily increasing throughout the world, and many investors worry the U.S. won’t remain immune from this bond market anomaly. Co-CIO Charles Tan shares why negative rates could present significant risks.
An inverted yield curve may signal trouble in the water. Despite the bond market’s warning, we still believe the U.S. economy may remain resilient.
For the first time in more than 10 years, the Federal Reserve cut short-term interest rate—a move Fixed Income Co-CIO John Lovito says “provides a cushion for U.S. economic growth and inflation.”
Volatility makes many investors nervous, but Fixed Income Sr. Portfolio Manager Kevin Akioka sees opportunity amid changing market conditions.
February 1, 2019
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The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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