Displaying items by tag: investment grade

With private credit booming, private equity firms are upping their forecasts for their lending businesses. Apollo Global sees loan origination exceeding $200 billion annually in the next couple of years, up from its previous forecast of $150 billion. It’s seeing increased loan demand due to faster economic growth and public and private spending on infrastructure.

What’s new is that many of these private equity giants are now looking at lower-risk lending to investment-grade companies to fuel growth. This would put them in even more direct competition with banks. Apollo’s co-President Jim Zelter sees many investment-grade domestic companies pursuing capital expenditure projects and believes that private credit can compete with fixed income and equity as funding sources.

Already, banks are feeling some impact. In Q1, JPMorgan reported $699 billion in non-consumer loans outstanding, which was a $3 billion decline from last year. CEO Jamie Dimon has warned that the entry of new lenders brings ‘an area of unexpected risk in the markets.’ 

Previously, he noted that these lenders have less transparency and regulations than banks, which ‘often gives them a significant advantage.’ He specifically cited startup banks, fintech companies, and private equity firms as examples of companies that function effectively as banks but are outside of the regulatory system. 

Finsum: Private credit is taking market share away from banks. Now, private equity firms are looking to target investment-grade companies. Many banks are warning that this brings risks to the financial system.

The stronger than expected jobs report and inflation data have punctured the narrative that the Fed was going to imminently embark on a series of rate cuts. As a result, volatility has spiked in fixed income as the market has dialed back expectations for the number of hikes in 2024.

Investors can still take advantage of the attractive yields in bonds while managing volatility with the American Century Short Duration Strategic Income ETF (SDSI) and the Avantis Short-Term Fixed Income ETF (AVSF). Both offer higher yields than money markets while also being less exposed to interest rate risk which has led to steeper losses in longer-duration bonds YTD. 

SDSI is an active fund with over 200 holdings and an expense ratio of 0.33%. Its current 30-day yield is 5.2%. The ETF’s primary focus is generating income by investing in short-duration debt in multiple segments such as notes, government securities, asset-backed securities, mortgage-backed securities, and corporate bonds. 

AVSF is even more diversified with more than 300 holdings and has a lower expense ratio at 0.15%. It has a 4.7% 30-day yield. AVSF invests in short-duration, investment-grade debt from US and non-US issuers. The fund’s aim is to invest in bonds that offer the highest expected returns by analyzing a bond’s income and capital appreciation potential. 

Finsum: Recent developments have led to a material increase in fixed income volatility. Investors can shield themselves from this volatility while still taking advantage of attractive yields with short-duration bond ETFs. 

Investors are piling into the investment-grade market at a record rate due to higher yields and concerns over riskier debt. A total of $19 billion has been poured into funds that buy investment-grade corporate debt since the start of 2023. That marks the most ever at this point in the year, according to data from fund flow tracker EPFR. The money pouring into the asset class underscores an eagerness among investors to buy historically high yields provided by safer corporate debt after years of investing in riskier debt in search of returns. According to Matt Mish, head of credit strategy at UBS, “People basically think that fixed income, in general, looks a lot more attractive than it has in prior years. The euphoria around investment grade is basically more broadly this euphoria around yields. At least relative to last year and really relative to most of the last decade, [high-grade corporate debt] is offering yields that are considerably higher.” For instance, average US investment grade yields have jumped to 5.45% from 3.1% a year ago. The soaring yields come as a result of the broad sell-off in fixed income over the past year as the Federal Reserve rapidly lifted interest rates to help tame sky-high inflation.

Finsum: Investors are piling into investment-grade bond funds due to historically high yields on safer debt after years of investing in riskier debt in search of returns.

If you’re looking to hedge your client’s portfolio from inflation, consider investment-grade ETFs. That is according to American Century Investments client portfolio manager Balaji Venkataraman. He spoke at the recent ETF Exchange conference in Miami Beach and noted how the Fed’s moves played a role in the dismal performance of bonds last year. However, he also added that investors may see increased value in fixed-income vehicles this year. He stated, “The rate risk has subsided meaningfully because the fixed income market tends to price in where the Fed is going well before the Fed gets there. And that’s why we’ve seen a decline in yields here today.” Venkataraman also noted that investment-grade bonds, which are a debt of higher-grade securities, could be critical investments during periods of heightened inflation, as yields begin to fall in response to the Fed easing rates. He stated, “The beauty of fixed income in this environment, if the Fed eventually does [come to] its peak in terms of the terminal rate, bond yields should probably continue to come down.” While bonds saw their worst year on record last year, fixed-income ETFs continued to see inflows. That trend continued into this year, as bond funds saw $20.8 billion in inflows in January, the most of any asset class last month, according to ETF.com data.  

Finsum:According to American Century Investments client portfolio manager Balaji Venkataraman, investors should consider investment grade bond ETFs during periods of heightened inflation, as yields begin to fall in response to the Fed easing rates.

Morgan Stanley recently announced the launch of an exchange-traded fund platform with the listing of six Calvert ETFs on NYSE Arca, including an actively managed fixed-income ETF. The Calvert Ultra-Short Investment Grade ETF (CVSB) will focus on investment-grade debt issuers. Managers Eric Jesionowski and Brian S. Ellis seek to maximize income, to the extent consistent with the preservation of capital, through investment in short-term bonds and income-producing securities. Investors will gain diversified short-term fixed-income exposure to an actively managed portfolio of high-quality bonds of issuers that Calvert believes are demonstrating effective management of key ESG risks and opportunities. The other five ETFs include four indexed ESG equity strategies and an active ESG strategy. The funds include the Calvert US Large-Cap Diversity, Equity and Inclusion Index ETF (CDEI), the Calvert US Large-Cap Core Responsible Index ETF (CVLC), the Calvert International Responsible Index ETF (CVIE), the Calvert US-Mid Cap Core Responsible Index ETF (CVMC), and the Calvert US Select Equity ETF (CVSE). As part of the announcement, Dan Simkowitz, head of Morgan Stanley Investment Management, said the following in a statement. “This launch is the first step in MSIM’s development of a robust ETF platform that supports products across our businesses, asset classes, jurisdictions, and brands.”

Finsum:Morgan Stanley announced the launch of an ETF platform and the listing of six Calvert ETFs, including an actively managed ultra-short investment grade ETF.