Investors are scaling back their exposure to riskier corporate debt, betting that a recent rally may have left the market vulnerable to a sell-off if global economic growth falters. Asset managers like BlackRock, M&G, and Fidelity International are shifting towards safer bonds, taking advantage of lower yields due to declining US credit spreads.
The decline in credit spreads has reduced the yield difference between corporate and government debt, making investors less willing to take on extra risk. Mike Riddell, a fund manager at Fidelity International, warned that if anything goes wrong globally, spreads can widen substantially, causing harm to investors’ portfolios.
Despite this, some bulls argue that ultra-tight spreads are justified by strong company balance sheets and expectations of interest rate cuts from the US Federal Reserve. However, renewed trade tensions and concerns over the automotive parts supplier First Brands Group have led to a slight widening of spreads, prompting investors to reassess their risk appetite.
Some hedge funds are also avoiding debt from weaker companies, citing the indiscriminate tightening of spreads this year. The overall yield on corporate bonds remains attractive due to rising government bond yields, but investors are becoming more cautious and shifting towards higher-rated credits and safer areas like covered bonds issued by life insurers.
Source: https://www.ft.com/content/2667cba1-5a44-4463-b20b-c2216c7899d8