Market Extra: Junk-rated debt looks safer than stocks as recession threat looms, according to Nuveen

by | Jul 18, 2022 | Stock Market

Bonds and loans issued by riskier U.S. companies with speculative, or “junk,” credit ratings likely offer investors better downside protection than stocks as investors gauge recession risks, according to asset manager Nuveen. With investors focused on the Federal Reserve’s potential to slam the brakes on the U.S. economy as it moves to dramatically raises rates to help cool stubbornly high inflation, corporate bonds and loans offering far meatier yields than in recent years likely provide investors better downside protection, Saira Malik, Nuveen’s chief investment officer, wrote in a Monday client note.

The yield on the ICE BofA U.S. High Yield Index has more than doubled to about 8.4% from a record low of less than 4% about a year ago, even though “credit fundamentals appear strong,” according to Malik. The index tracks companies with below investment-grade credit ratings, or in the BB to D category. While excessive borrowing can come back to bite, the record boom in pandemic debt issuance at ultralow yields has been a positive factor for many companies with weaker credit profiles, she said, given that “debt burdens aren’t excessive and low financing rates have been locked in.” Specifically, Nuveen pegged about 75% of outstanding junk bonds and loans as coming due after 2025 (see chart), giving speculative-grade companies more wiggle room if a recession h …

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