Navigating the New World of Fixed Income Investing

The world of fixed income investing has undergone a significant transformation in the wake of the pandemic. According to LSEG Datastream data, a staggering 86% of global fixed income assets are now yielding 4% or more, a stark contrast to the less than 20% seen in the decade prior to the pandemic. This shift means that long-term investors no longer need to take on additional risk to generate solid income.

Furthermore, U.S. companies have demonstrated resilience to higher rates, with Bloomberg data revealing that U.S. investment grade companies have less than 10% of outstanding debt coming due annually through 2030. Many companies took advantage of low rates during the early stages of the pandemic, converting short-term debt to long-term, resulting in a significant decrease in corporate net interest payments even after sharp rate hikes.

Despite the attractive total income on offer for fixed income investors, a selective approach to credit is advised. Spreads have tightened due to strong demand relative to supply and resilient corporate balance sheets, with U.S. investment grade company spreads currently near their tightest levels in two decades.

In terms of credit preferences, short- and intermediate-term bonds are favored, along with high yield credit on a global scale. European longer-term credit is preferred over U.S. credit due to relatively wider spreads. The upcoming French parliamentary election on July 7 is also being closely monitored, as France makes up a significant portion of the European corporate bond universe.

Looking ahead, a tactical approach to equities is recommended over credit on a six to 12-month horizon, with an overweight position on stocks and the AI theme. On a strategic horizon of five years and longer, private credit is favored over public, despite rising U.S. direct lending default rates. Private credit is seen as playing a crucial role in the future of finance, driven by increasing demand for non-bank lending.

In conclusion, the recent rate hikes have brought total income back into fixed income investing. Investors are advised to seek out pockets of credit where they are adequately compensated for risk, while also considering equities for a more attractive risk-return profile.
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