Credit Alpha Seen as Solution

What’s the outlook for fixed income investing? One line of wisdom has it that the future is not bright. Inflation and interest rates will go up, bond prices down. It probably is a bad time to hold an aggregate bond index.  Funds with credit expertise, however, are a different story. 

“You have to stay away from the beta,” says an investor, referring to aggregate market returns—but the ability to select debt with better risk-adjusted returns, in other words to make alpha on credit, remains attractive.

You hear it from many people. This is a credit-pickers’ market, says Steven Baffico, senior managing director at Guggenheim Partners. There is excellent value to be found by those who understand the idiosyncrasies of each credit, he said at a seminar. Guggenheim manages various strategies, including credit. The firm is one of the very few managers that emerged stronger from the crisis—assets are around $100 billion, up from $40 billion in 2008.

Another key point is that demand for paper is sure to grow. As Baby Boomers retire,  pensions and retirement accounts will allocate more to fixed income and less to equity in order to meet the benefit payments. Increased demand for bonds will put downward pressure on rates—-a counter to other factors such as restrictive monetary policy by central banks.

As far as the US is concerned, Mr. Baffico argued that the Federal Reserve will keep rates down as long as property markets and employment remain weak. It’s been a 30-year bull market in fixed income but rates will stay low for some time, he says.


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