Investors have been somewhat more cautious on the corporate-debt sector lately, with spreads — which measure the yield advantage versus Treasuries — tight by historical standards. To be sure, the financial health of corporations in the investment-grade space continues to be quite strong. However, in a slow-growth macroeconomic environment, we believe it may prove challenging for corporations to continue to improve their margins and increase their revenues. The risk, we feel, is not so much one of potentially deteriorating fundamentals, but of investors concluding that investment-grade corporate debt has reached something of a plateau.
Our base case forecast calls for continued economic growth and continued volatility on the long end of the yield curve. In such an environment, we believe there are ample opportunities to add value through our fundamental research-based approach. We continue to focus on opportunities in credit and prepayment strategies, and consider declining interest rates to be an unattractive driver of returns.