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| Greg Peters |
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| Jeff Rosenberg |
Corporate bond strategists say the investment-grade and high-yield markets will continue to offer attractive returns this year, despite expectations that interest rates will rise and that last year's double-digit returns squeezed most of the juice out of fixed-income spreads. Fundamentals and technicals are both pointing to another positive year, they say. Outstanding bonds from high-beta telecom, media and technology issuers are among those that will outperform their peers this year, although to a lesser extent than they did last year, forecasts Greg Peters, an investment-grade strategist at Morgan Stanley in New York. Auto and airline bonds, which had a volatile last year headlined by Ford Motor Co.'s downgrade to a notch above junk status, may also lead the charge. "Clearly, these sectors are not without operational risk, but we are comfortable with the risk/reward as the macro economy firms," he says.
On the flip side, Peters and other strategists expect bonds from financial companies to lag. "Issues that are likely to suffer the most are issues with the least amount of credit risk," says Jeff Rosenberg, head of credit strategy at Banc of America Securities. He also expects lower-quality bonds will outperform, as investors search for more yield and higher-quality issuers are more impacted by an expected rise in short-term interest rates. Specifically, Rosenberg mentions the utility and cable sectors as ones that should outperform as investors take on increasing levels of credit risk.
The technical outlook is positive, too. Higher rates forced issuers to pre-fund late last year, leading to record levels of issuance in high yield and investment grade. As a result, supply is expected to be lower this year. "Any year in comparison [to last] is going to seem like a slowdown," says Rosenberg. This should put attention back on the secondary market as investors put more cash to work in outstanding product, adds Peterson. "As such, you'll continue to see a strong technical picture," he explains.
