A positive outlook for credit conditions

Though credit conditions are off their peak, portfolio managers Michael Wildstein and Chris Testa believe that they should remain solid for both investment grade and high yield issuers through the coming years.

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Michael G. Wildstein, CFA
Senior Portfolio Manager, Corporate Credit

In terms of the credit cycle, we believe we are in the expansion phase, or the final phase of the credit cycle. That said, we believe the cycle can go on for another two or three years. We still think credit fundamentals, though clearly off the peak, are still sound. Most of the signals we look at to determine whether credit is contracting are still positive. And the demand for credit is another positive technical because it allows issuers to refinance at attractive rates.

Credit conditions from a high yield perspective

Christopher M. Testa, CFA
Senior Portfolio Manager, Corporate Credit

We are in the middle to late phases of the credit cycle. Clearly it’s a mature market. We’ve had spreads recover from the wide levels of the global financial crisis. I would say that we’ve got at least two years to go before defaults will get back to median levels, and since we’re at median levels of spread right now, we’re actually being compensated for that.

So, high yield’s okay right now. We think we can get nice returns. We think there’s a couple years before defaults pick up, so we’re not concerned about the credit cycle just yet.


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