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April 15, 2020 | GSAM Connect

Corporate Credit: The Time is Now

  • US corporate credit has been among the sectors most affected by recent market volatility, with exposure to both the economic impact of coronavirus and the collapse in oil prices. While credit faces fundamental challenges, for investors seeking opportunities in an uncertain environment, we see several reasons why now might be the time to consider credit.
  • First, credit spreads continue to offer significant compensation for recession and downgrade risk. Second, the US Federal Reserve (Fed) will soon begin buying corporate credit outright for the first time ever. Third, we expect strong demand for credit as a source of yield and diversification against equity risk.
  • We believe the current opportunity is in high quality corporate bonds. In our view, short to intermediate maturities offer an attractive risk-return profile for opportunistic investors, with the potential for spread tightening that may produce one-year returns in the 4% to 6% range (Exhibit 1). For pension plans and other long-term investors, we believe longer-term credit can offer an attractive alternative to low-yielding government bonds.
  • Over time, we think credit can continue to offer opportunities, as Fed purchases in investment-grade credit could lead to tighter spreads across the credit spectrum, including high yield, as was the case with corporate credit purchases conducted by the European Central Bank (ECB).
  • In our view, an opportunistic approach not tied to a benchmark offers the most attractive strategy for capturing attractive valuations in credit. Buy-and-maintain strategies can also offer an attractive approach for capturing elevated yields while minimizing portfolio turnover.

Exhibit 1: Spread and Total Return Scenarios for A-Rated 5-Year US Corporate Credit

Exhibit 1: Spread and Total Return Scenarios for A-Rated 5-Year US Corporate Credit

Source: GSAM, ICE BAML as of April 13, 2020. Spread scenarios are GSAM estimates for illustrative purposes only. Past performance does not guarantee future results, which may vary. The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved.  Please see additional disclosures at the end of this presentation.

 

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