To ensure an optimal and secure experience, please upgrade to the latest version of your browser.
Investors looking to plot a course through fixed income in 2019 could do well to keep a sharp eye on the question of the triple-B overhang. It’s called an overhang for a reason.
Over the last 10 years, the amount of debt rated at this level has grown significantly, climbing from around 25% of the Bank of America Merrill Lynch Global Corporate Index1 in 2008 to just under 50% today. More recently, the growth of outstanding BBB debt has largely been a result of increased M&A-related activity and, in the U.S., stock buybacks.
The growth in BBB issuance has been compounded by what we refer to as the ‘rising star’ phenomenon, that is, high yield issuers being upgraded to investment grade. As a result, the amount of outstanding BBB debt has grown significantly relative to outstanding B and BB debt.
While this recent trend is fine in theory, in practice it means that the potential overhang of debt which could be downgraded to high yield is significant.
The larger the pool of BBB issues on the threshold of investment grade, the larger the potential volume of downgrades during future credit events.
Our view is that when bonds are downgraded to high yield it can represent an opportunity, as bond prices tend to fall before a downgrade, then recover some of those losses after the downgrade has occurred. But careful analysis is needed. The dangers of a passive approach to high yield is that issues that are downgraded are bought regardless of their long-term outlook.
1 The ICE BofAML Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and eurobond markets.
All investments involve risk including loss of principal.
Charts are provided for illustrative purposes and are not indicative of the past or future performance of any Dreyfus product.
Views expressed are those of the advisor stated and do not reflect views of other managers or the firm overall. Views are current as of the date of this publication and subject to change. Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.
Bonds are subject to interest rate, credit, liquidity, call and market risks, to varying degrees. Generally, all other factors being equal, bond prices are inversely related to interest-rate changes and rate increases can cause price declines. High yield bonds involve increased credit and liquidity risk than higher rated bonds and are considered speculative in terms of the issuer’s ability to pay interest and repay principal on a timely basis. Currencies can decline in value relative to a local currency, or, in the case of hedged positions, the local currency will decline relative to the currency being hedged. These risks may increase fund volatility. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.
Past performance is not a guarantee of future results.
Insight Investment advisory services in North America are provided through two different investment advisers registered with the Securities and Exchange Commission (SEC), using the brand Insight Investment: Insight North America LLC (INA) and Insight Investment International Limited (IIIL). The North American investment advisers are associated with other global investment managers that also (individually and collectively) use the corporate brand Insight Investment and may be referred to as “Insight” or “Insight Investment.”
BNY Mellon Investment Management is one of the world’s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. © 2019 MBSC BNY Mellon Securities Corporation, distributor, 240 Greenwich Street, 9th Floor, New York, NY 10286.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Contact a financial advisor or visit im.bnymellon.com to obtain a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.