Investment insights from Capital Group
While all recessions have unique characteristics, the current downturn has had a very unusual catalyst in the coronavirus pandemic. Markets have taken solace in the liquidity provided by central banks, and companies have been able to issue debt at record levels in 2020. Investment-grade bond spreads tightened 14 basis points (bps) to 136 bps on an option-adjusted basis during the third quarter, but that mostly took place in July. Economic news has been mixed, likely contributing to the range-bound nature of corporate bond spreads for the rest of the quarter.
The Capital Group Long Duration Credit Composite rose in absolute terms during the quarter but trailed the benchmark Bloomberg Barclays U.S. Long Credit Index. A few utilities sector holdings exposed to California wildfire risk weighed on relative returns from issuer selection during the third quarter. This was mostly offset by strong issuer selection in the energy sector.
At current elevated valuations, investment-grade corporate bonds generally reflect much of the upside in potential economic activity but very little of the risks on the horizon, including uncertainties related to the path of the virus and the looming U.S. election.
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