Even if they could get cheaper, Brill said the chance to make money today on the yields at a very high coupon for quality investment grade bonds is a lot greater than at the beginning of the year, “so you’ll get a materially higher amount of yield for the same credits now”.
“If you wanted higher yields, well, you got higher yields. But, it’s always tough to pull the trigger at these points,” he said, noting they’re now offering a 3% advantage over stocks, which makes them a good alternative for longer-term yield or income-focused investors. But, he acknowledged that investors may find it difficult to buy when they’re still seeing losses on paper.
Brill also said that, even though credit spreads are at their highest outside of the pandemic since the 2008 financial crisis, they have already been priced in. Given that usually heralds a recession, he felt we’re still at the low end of the recession range, though it’s been the most anticipated slowdown.
“A lot of the pain has already been taken, but there are still going to be a fair number of bad things to come. So, it’s going to be a continued volatile period of time,” he said, noting that interest rates are expected to rise for awhile yet as the banks try to combat inflation. “But, I’d say that credit spreads are a little like inflation: you don’t necessarily need them to come down, you just need them to stop going up. If they just stay still, they’re going to look very attractive.”
Brill said the credit spreads had been widening throughout the year. But, while the central banks are signalling they’ll be more aggressive over the short term, a lot of that has already been priced in and most North American companies are in very good shape going into this slowdown, even though inflation may not cool until the fall period of September to November.
