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31 March 2021 | GSAM Connect

Credit Check-In: Credit Opportunities in a Reflationary and Pro-Cyclical Environment

Central banks remain dovish and growth optimism is building. Where are the opportunities in credit markets?

  1. Bank loans. Coupons attached to bank loans are floating rate in nature and therefore move higher alongside a rise in rates. The recent sell-off in rates has therefore prompted inflows into the bank loan asset class. But with the US Federal Reserve (Fed) cementing its dovish policy stance at its March meeting, rising rates should not be the sole motivator for an allocation to bank loans. The asset class also provides an attractive yield relative to other fixed income spread sectors. In addition, loans rank higher in a company’s capital structure than high yield rated bonds, and are secured by collateral of a company. These are attractive traits in a macro environment that is in somewhat of a state of flux; vaccine-driven growth improvements are in the pipeline but at the same time policy support may begin to be lessen as the economy recovers, potentially creating idiosyncratic challenges.
  2. Pro-cyclical Pockets of Credit Markets. Given growth improvements have yet to move from forecast to fact, we think it would be premature to step back from pro-cyclical exposures. At an asset class level, we favor high yield corporate credit. Within asset classes, we see value in issuers from cyclical industries that will benefit from re-openings. That said, with spreads at the index level largely retracing post-pandemic widening, our focus is on security selection. In addition, we see value in gaining exposure to steeper portions of the investment grade credit curve to benefit from “carry and roll” potential.

 

Overheard at Goldman Sachs

Each month we feature quotes from our investment team, offering a glimpse into what we are monitoring and analyzing.

"The brighter growth outlook has helped growth-oriented areas of fixed income markets like bank loans perform well, while longer duration portions of the market have lagged. High yield and bank loans represent great opportunities on a go forward basis from here."

— Ashish Shah, Co-chief investment officer of Global Fixed Income | March 17, 2021

Exchanges at Goldman Sachs | Special Episode: What the American Rescue Plan Means for the Economy, Markets, Corporations and Investors

 

"Bank loans are floating rate so benefit from higher rates. At the same time, they provide an attractive yield, are higher up in the capital structure than corporate bonds and are secured. For all of these reasons, we think it is a good time to invest in bank loans."

— Lori Pomerantz, High Yield and Bank Loans Portfolio Manager, Global Fixed Income | March 11, 2021

The Daily Check-In | Investing in High Yield Bonds and Bank Loans

 

Source: GSAM. For illustrative purpose only. Note: Comments may be paraphrased.

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