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Quick Takes: Should Investors Be Wary of the Ballooning BBB Market?

As the BBB credit market continues to grow and BBB leverage metrics increase, portfolio manager Sonali Pier explains how PIMCO deciphers which credits are likely to improve and which are likely to head to high yield.

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Sonali Pier: Hi, I'm Sonali Pier, a portfolio manager focusing on multi-sector credit and high-yield opportunities.

The BBB market has increased significantly over the last few years, and for context, this graph shows the BBB segment of investment grade is larger than high-yield and bank loan markets combined.

BBB's now make up roughly 44 percent of the entire investment grade credit market, while ten years ago they were just 32 percent.

Given BBB's alone are a 2.6 trillion market and the high-yield market stands at 1.3 trillion, there's increasing concern about investing in BBB's passively due to the limited absorption power of fallen angels in the high-yield market.

The new neutral view on interest rates, coupled with higher enterprise values and corporate M&A, has fueled an increase in BBB leverage metrics as well. The recent M&A issuance accounts for 30 percent of the BBB- exposure, increasing that risk of investment grade credits migrating into high yield when the company and/or sector fundamentals deteriorate or synergies don't materialize.

This is where we believe active management is the best able to decipher which credits amongst this growth in BBB's are likely to improve and which are likely to head to high-yield.

To exploit these opportunities to the fullest, we prefer a multi-sector credit approach that has the flexibility to look for the best risk-adjusted returns across the capital structure, especially at this point in the cycle.

Credit research is human capital-intensive, and we believe our in-depth knowledge of companies, industries, and modeling gives PIMCO a potential edge in navigating these changing credit markets globally.

Disclosure


Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. It is not possible to invest directly in an unmanaged index.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. It is not possible to invest directly in an unmanaged index.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only 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.

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