Kevin F. Murphy, Portfolio Manager, March 15, 2010
There is potential for attractive opportunities in the corporate credit market this year, particularly in investment-grade and high-yield bonds.
Year to date through March 2, investment-grade corporate bonds had a total return of 2.05% according to Barclays Capital Corporate Bond Index.
Fundamentally, corporations went into the economic downturn with low levels of leverage. Even when the slowdown reached its trough, most companies were still generating cash and profits.
From a liquidity standpoint, many corporations used the unprecedented demand for investment-grade corporate risk to refinance bonds that had maturities of one, two, or three years. As a result, the maturity profile of corporate liabilities is longer than it has been in some time, greatly reducing refinancing risk in the sector.
Corporations have also been extremely aggressive at cutting costs. In our view, as we move into 2010, it will likely only take a small increase in top-line demand to create outsized returns.
Most companies reporting earnings so far this year, according to a February 23 Bloomberg analysis, have done better than expected. According to Bloomberg research, 73% of the 441 companies of the S&P 500 Index that recorded fourth-quarter earnings this year have exceeded analyst estimates.
Consider these risks before investing: Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. The use of derivatives involves special risks and may result in losses. Funds that invest in bonds are subject to certain risks including interest-rate risk, credit risk, and inflation risk. As interest rates rise, the prices of bonds fall. Long-term bonds are more exposed to interest-rate risk than short-term bonds. Unlike bonds, bond funds have ongoing fees and expenses.