Investment Actions

Credit investing
in a reflationary era

Jan 23, 2017
By David Trucano, Jeff Cucunato

Years of low rates have led fixed income investors to look to credit investments for the returns they need. A new regime of fiscal stimulus, reflation and rising rates won’t change the basic dynamic: structural forces such as aging populations and weak productivity growth are likely to keep rates below historical levels for some time. But credit investors face a changing landscape, with a broader credit universe, a drawn-out credit cycle and new political and economic uncertainties.

Today, we see stronger growth favoring credit over government bonds and believe fixed income investors are being paid to take risk. Credit markets have a larger cushion than government bonds against the risk of further rises in interest rates. Yields are lower than they were before the financial crisis, but look favorable compared with government bonds. See the chart below.

Credit attractions

Selected asset yields: current vs. pre-crisis average

Credit attractions

Sources: BlackRock Investment Institute, Thomson Reuters, Bank of America Merrill Lynch and J.P. Morgan, December 2016. Notes: the pre-crisis average is based on the five-year period before the financial crisis (2003-2008). Corporate bonds are based on Bank of America Merrill Lynch US Corporate Master, Euro Corporate, UK Corporate, US High Yield Master and European High Yield indexes. Emerging debt dollar is based on the J.P. Morgan EMBI Global Diversified Index; EM local is based on the J.P. Morgan GBI-EM Diversified Index.

To make the most of their credit allocations, investors will need to rethink how they can diversify their portfolios and seek to capture more alpha. We present two interviews with BlackRock portfolio managers who explain why they believe market conditions favor flexible multi-asset and opportunistic credit strategies.

Interview 1: Multi-asset credit
Jeffrey Cucunato, head of BlackRock's U.S. investment grade credit team, discusses the applicability of a multi-asset approach in today’s markets.
Interview 2: Opportunistic credit
David Trucano, lead portfolio manager for BlackRock’s Credit Alpha and Global Credit Opportunities Fund discusses the evolution of opportunistic credit.

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