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DiMeo Schneider & Associates

Fixed Income | Investment Manager Research

State of the Markets: Credit’s Evolution

February 25, 2020

• Corporate credit markets persistently outperformed other fixed income asset classes for the majority of the last economic cycle. In 2019, surprisingly, higher rated investment grade credit outperformed its lower rated, high yield counterpart.

• Leverage levels and the growth in BBB-rated corporate credit could signal a warning to the market which presents both risks and opportunities.

• The below investment grade market underwent a meaningful structural change throughout this cycle, with supply and demand dynamics materially impacting the way investors access leveraged credit.

• Leveraged credit markets are more bifurcated than ever with select sub-sectors singing a different tune in terms of performance. As for quality, yield dispersions tell the story behind the song which could impact near term portfolio construction.

Throughout 2019, credit assets continued their dominant streak of performance across domestic fixed income markets. Corporate credit, in particular, rallied in the post-crisis era as yield oriented investors sought to increase returns during a consistently downward moving interest rate environment, save for brief periods of upward yield movements.

This consistent reign of performance has changed the relationship between credit and other asset classes in portfolios, and instigated questions about the timeline of this rally. These questions are justified, with both investment grade and high yield corporate credit rallying more than 14 percent in 2019 and investment grade credit generating better relative returns to its riskier leveraged credit counterparts.

Click here to read more of the white paper State of the Markets: Credit’s Evolution.

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