Finding value in corporate credit
After fluctuating in a fairly narrow range in January and February, bond yields around the world declined in March. Central banks signaled that they were willing to keep interest rates low for significantly longer. Within this environment, corporate credit — both high-yield and investment-grade — emerging-market debt, and mortgage credit outperformed U.S. Treasuries and other government securities.
Following a sharp downturn in 2018's fourth quarter, investment-grade credit had its best start in 20 years in 2019's first quarter. Our outlook for corporate credit remains favorable as the U.S. economy continues to expand and fundamentals remain generally firm. The spread on corporate bonds, including investment grade, narrowed meaningfully during the first quarter after a challenging fourth quarter. As a result of this big move higher in bond prices, it has become somewhat more difficult to find compelling values in these sectors.
Renewed appetite for mortgage strategies
Commercial mortgage-backed securities (CMBS) rallied along with other risk-driven assets. We continue to find relative value in mortgage credit, prepayment risk, and corporate credit. In our view, the yield premiums provided by CMBS, agency IO CMOs, non-agency residential mortgage-backed securities, and high-yield corporate bonds offer relatively attractive risk/reward profiles.
High-yield bonds in demand
High-yield bonds rose 7.30% for the quarter, as measured by the JPMorgan Developed High Yield Index, outpacing both high-yield bank loans and the broad investment-grade fixed-income market. The high-yield market had its strongest start to a calendar year on record in the first quarter. We think the fundamental backdrop for high yield remains supportive, led by a strong labor market and rising employee wages. Additionally, overall default levels have significantly fallen over the past 12 months and are at levels last seen in 2014. In terms of valuations, high-yield spreads have narrowed. As a result, it has become more challenging to find compelling values in the market. We favor higher-quality BB-rated bonds relative to CCC-rated credits.