Historically, speculative-grade bonds were issued by companies that were newer, were in a particularly competitive or volatile sector or had troubling fundamentals. Today, there are also many companies whose businesses are designed to operate with the degree of leverage traditionally associated with speculative-grade companies. While a speculative-grade credit rating indicates a higher default probability, these bonds typically compensate investors for the higher risk by paying higher interest rates, or yields.
Credit ratings can be downgraded if the credit quality of the issuer deteriorates or upgraded if fundamentals improve. The price of a corporate bond is influenced by several factors, including the maturity, the credit rating of the company issuing the bond and the general level of interest rates. Most corporates typically have more credit risk and higher yields than government bonds of similar maturities.
This divergence creates a credit spread between corporates and government bonds, so that the corporate bond investor earns extra yield by taking on greater risk. The credit spread affects the price of the bond and can be graphically plotted and measured as the difference between the yield of a corporate and government bond at each point of maturity.
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Similar to government bonds, corporate bonds are exposed to interest rate risk. In addition, corporate bonds also have credit or default risk - the risk that the borrower fails to repay the loan and defaults on its obligation. The level of default risk varies based on the underlying credit quality of the issuer. With the global economic recovery underway, we chart the portfolio implications for the year ahead across a range of asset classes, including rates, credit and emerging markets.
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Looking for investment ideas for the year ahead? Learn why housing-related assets and private credit strategies are two of our highest conviction ideas for While the COVID pandemic has disrupted global credit markets, we believe bottom-up research can reveal investment opportunities for It will continue to be important to be an active investor during this period of transition and to carefully monitor the impact of policy on credit sectors.
Two bar charts show year after-fee excess returns for fixed income and equity, Bloomberg Barclays U. Corporate OAS narrowed significantly in Q4 , leaving spreads little changed from the end of Spreads on these credit default swap indexes are indicators of broader credit market conditions. The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. A word about risk: Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates.
Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility.
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Bond investments may be worth more or less than the original cost when redeemed. Certain U. Obligations of U. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Floating rate loans are not traded on an exchange and are subject to significant credit, valuation and liquidity risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not ensure against loss. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.
This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Investors should consult their investment professional prior to making an investment decision. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. PIMCO provides services only to qualified institutions and investors.
This is not an offer to any person in any jurisdiction where unlawful or unauthorized. They are not available to individual investors, who should not rely on this communication. The services and products provided by PIMCO Switzerland GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser.
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Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss.
All profits and losses incur to the investor. BlackRock provides access to opportunities in global fixed income markets guided by insights and innovations developed throughout more than 20 years of business.
A global platform underpins our fixed income trading and risk management, enhancing execution and reducing operational risks. Our proprietary technology, analytics and research resources help us constantly improve our portfolio management and trading strategies. Our portfolios employ an investment process which is research driven and blends disciplined portfolio construction with regular risk and performance review.
Our professionals identify unrecognised value in the fixed income markets through rigorous proprietary fundamental research that balances bottom-up research analysis with top-down investment themes. The investment decisions are made based on issuer and security selection, sector rotation, duration and yield curve strategies and currency strategies.
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In Asia, BlackRock has expertise to offer clients access to the full range of opportunities in the regional debt securities through its Singapore-based active fixed income team. BlackRock also features a model-integrated approach to active fixed income that combines the insights of our people with a quantitative research platform to generate high quality alpha across fixed income asset classes.
The distinguishing feature of BlackRock's fixed income investment management style is the ability to generate alpha within a risk-managed framework. Real-time analysis of a vast array of risk measures allows assessment of the potential impact of various strategies on total return. BlackRock offers beta fixed income across the debt universe, and our iShares business continues to help our clients access and manage exposure to global bond markets.
BlackRock's institutional index fund and ETF strategies span the world's investable fixed income markets. Our portfolio construction process entails detailed benchmark knowledge, efficient trading, and performance analysis. Daily updates from index providers keep us abreast of new securities and any index methodology changes.
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