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Investment Grade Credit, High Yield Debt, Emerging Markets Debt Appear Attractive, Standish Says

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NEW YORK, Aug. 28, 2013 /PRNewswire/ -- Investment grade credit, high yield debt and emerging markets debt appear attractive to fixed income investors, according to a recent report from Standish, the Boston-based fixed income specialist for BNY Mellon.

The report, Bond Investors Keep Calm and Carry Carefully, notes the importance of focusing on areas of the market where valuations are attractive while avoiding idiosyncratic risks. 

The nearly 100-basis-point increase in 10-year Treasury yields between May and June pushed the yields into the low-end of Standish's fair valuation range, increasing the attractiveness of several fixed income categories, the report said.

Long corporate bond spreads widened during the rise in yields to 197 basis points (bps) over Treasuries. "Long corporate valuations appear attractive, particularly for pension plans that are now in better financial shape and looking to implement liability driven investing (LDI) strategies," said David Leduc, chief investment officer of the active fixed income division of Standish and author of the report.  "It may be an opportune time to increase allocations to long corporate bonds while the supply and demand picture is still relatively balanced."

The recent sell off in emerging markets has made this sector increasingly attractive, Standish said.  "Tighter fiscal policies, lower debt levels and relatively low inflation pressures mean that emerging markets generally enjoy greater policy flexibility than developed markets," Leduc said. 

If the U.S. outlook continues to improve, as Standish expects, emerging market countries could benefit from the ensuing increase in trade and international investment, the report said.  However, Standish said it is being selective as some countries and companies could face challenges in a higher interest rate environment, particularly if portfolio flows to emerging markets halt or temporarily reverse.

Regarding carry, Standish sees it as attractive in some market sectors and unattractive in others where the potential risks outweigh the potential returns.

Carry is one of the two components that determine the total return of a bond, with appreciation being the other component.  Assuming that the price stays constant, the carry of a bond is its current yield   The value of carry can change due to market fluctuations, possibly lowering or increasing the return to investors, Standish said. 

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