PORTUGAL 2021 Midyear Market Outlook

Creativity in an Era of Rising Yields

Credit sectors may offer opportunities, but interest rate risk bears watching

Despite Inflation Signs, Yields Are Still Low

Yields on U.S. Treasuries and investment-grade corporates remain surprisingly low given the strength of the recovery and the signs of higher inflation, argues Mark Vaselkiv, CIO Fixed Income. Risk-averse but yield-hungry institutional investors still have a strong appetite for such debt.

Low yields and extended durations (a measure of interest rate risk) suggest caution is advised in the investment-grade space.

If yields rise in the second half, credit sectors such as high yield bonds, bank loans, and EM corporates could offer opportunities.

Are Credit Spreads Too Tight?

Credit spreads (the yield premiums vs. Treasury securities) are historically narrow.
Fundamentals support tight spreads, according to Mark Vaselkiv, CIO Fixed Income.

Credit Conditions Have Improved

Defaults have plummeted, and there are fewer distressed companies.
Corporations have repaired their balance sheets.
Credit upgrades are poised to outpace downgrades, Vaselkiv predicts.

The Takeaway

Institutional demand is holding down Treasury yields despite interest rate risks.
Low yields and long durations mean high-quality sectors are vulnerable.
Credit spreads are tight but appear justified by fundamentals.

Spotlight on Interest Rate Risk

Floating rate bank loans offer a combination of relatively high yields and short duration (an average of 90 days), notes Mark Vaselkiv, CIO Fixed Income. That could put investors in a potentially attractive position as they wait to see how soon—and how quickly—interest rates will rise.

Quality Sectors Are Vulnerable
Duration and yield across fixed income sectors

As of May 31, 2021
Past performance is not a reliable indicator of future performance. Yield and duration are subject to change. Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index.
Sources: Bloomberg Finance LP, J.P. Morgan Chase (see Additional Disclosures), and data analysis by T. Rowe Price.
Indexes used: U.S. Treasuries: Bloomberg Barclays U.S. Treasury Index; U.S. IG Corporates: Bloomberg Barclays U.S. Corporate IG Index; U.S. Aggregate: Bloomberg Barclays U.S. Aggregate Bond Index; U.S. High Yield: Bloomberg Barclays U.S. High Yield Index; EM Sovereign USD: J.P. Morgan EMBI Global Diversified Index; EM Sovereign Local Currency: J.P. Morgan GBI EM GD Index; EM Corporates: J.P. Morgan CEMBI Broad Diversified Index; Japan Gov’t. Bonds: Bloomberg Barclays Asian Pacific Japan Index; German Bunds: Bloomberg Barclays Global Treasury Germany Index; Global High Yield: Bloomberg Barclays Global High Yield Index; Global Aggregate USD Hedged: Bloomberg Barclays Global Aggregate Index USD Hedged; Bank Loans: J.P. Morgan Levered Loan Index; U.S. Short‑Term Gov’t./Credit: Bloomberg Barclays Short‑Term Government/Corporate Total Return Index Value Unhedged USD.