Wealth Outlook 2024 - Slow then grow

51 Wealth Outlook 2024 | Portfolio views Peak rates equals peak income: extend duration Investment grade credit Corporate bonds have higher yields than Treasurys of comparable maturity, reflecting corporates’ relatively higher credit risk. Still, the repayment risk for intermediate-term investment grade (IG) bonds issued by large, healthy companies with low levels of debt compared to earnings is generally much lower than it is for lower-rated high-yield bonds with higher level of debt to earnings. The intermediate-term IG index comprises debt of 1- to 10-year maturities, with low overall average duration – or price sensitivity to interest rate changes – of about four years. The IG index currently yields about 5.71%, about 1.05% above comparable-maturity (i.e., 4-year) Treasury bonds (as of November 23, 2023, FIGURE 3 ). Besides investing in an ETF or mutual fund whose strategies are an index, investors may consider individual bonds, as there may be higher yield levels on individual IG-rated bonds for suitable investors who understand the credit risk of the issuer. An index is an “average” of yields, so often there are numerous examples of high-quality credits that pay above-index yields. For example, recently many of the largest US banks’ bonds of around 5-year maturities yielded more than the IG index referenced above. For those wishing to seek returns above those of the index, actively managed fixed income strategies can be considered. FIGURE 3 Intermediate-term corporate yields vs 5-year US Treasury yield 4 2 Yield (%) US intermediate-duration IG corp yield 5yr US Treasury yield 6 2012 2014 2016 2018 2020 2022 2024 Source: Bloomberg, as of November 22, 2023. Bloomberg Intermediate Corporate Total Return Index used for US intermediate-duration IG corp yield. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.