Volatility and the corporate bond market: A familiar path
April 25, 2012
It's easy to lose track of how many times we've been down this familiar path (of sovereign debt–related volatility) in the last few years, but if one were to substitute "Greece" with "Spain", and increase the significance of how critical (or dire) that country’s economy is to the broader euro zone economy, it would provide an accurate snapshot of the critical factors currently facing the corporate bond market and determining risk sentiment.
At the individual company level, we see no real concerning cracks. We still see plenty of companies with solid balance sheets, ample liquidity, moderate growth and cash-flow projections, and with cautious, responsible management teams. In the near term, we expect further comments from European Union leaders and the European Central Bank aimed at helping to ease risk aversion. But in our opinion, in order to feel more comfortable with the situation at hand, investors are going to require a high intensity, material, and perhaps even radical, action from central banks and/or euro zone governments. Nonetheless, this is the state of risk markets, and has been for some time now: headline-dominated with scary, seemingly endless economic overhangs that, at times, overwhelm a market. This economic environment is offset by companies with solid fundamentals and continued demand for income in a low yield environment with limited choices.
Even with these obstacles, we remain positive on corporate credit. We believe investment grade corporate debt remains highly competitive versus other investment grade options as the asset class offers investors various features, such as diversification (highlighted by a strong and global new-issue calendar), duration, liquidity, and yield. We believe positioning among the higher-beta (riskier) segments of the corporate market could be critical to results in 2012. The sectors we are most focused on presently are generally cyclical in nature, including financials — especially banks — as well as metals/mining/paper, chemicals, and foreign issuers.
The views expressed represent the Manager's assessment of the market environment as of April 2012, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the manager's current views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting the fund literature page or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
IMPORTANT RISK CONSIDERATIONS
Investing involves risk, including the possible loss of principal.
Fixed income securities can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder a issuer’s ability to make interest and principal payments on its debt.
Fixed income securities and bond funds may also be subject to prepayment risk, the risk that the principal of a fixed income security may be prepaid prior to maturity, potentially forcing the investor to reinvest that money at a lower interest rate.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.
International fixed income investments are subject to currency risk. Adverse changes in foreign currency exchange rates may reduce or eliminate any gains provided by investments that are denominated in foreign currencies and may increase losses.
If and when a portfolio invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the portfolio will be subject to special risks, including counterparty risk.
Diversification may not protect against market risk.