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United States Institutions EN Select your country: Internal View Log in Menu Our services in the selected location: * Institutions * Individual Investors * Financial Intermediaries Select Location: United States * Australia * Bahrain * Belgium * Canada * China * Cyprus * Danmark (Denmark) * Egypt * France * Germany/Austria (German) * Greece * Hong Kong/ 香港 * Iceland * International * Ireland * Israel * Italia (Italy) * Japan * Korea (South) * Kuwait * Latvia * Libyan Arab Jamahiriya * Luxembourg * Malaysia * Mauritius * Nederland (Netherlands) * New Zealand * Nigeria * Norge (Norway) * Oman * Poland * Qatar * Saudi Arabia * Schweiz / Switzerland / Suisse / Svizzera * Singapore * South Africa * Spain * Suomi (Finland) * Sverige (Sweden) * Taiwan * Uganda * United Arab Emirates * United Kingdom * United States Remember my selection View Global Site Your browser is out of date. * * Our Clients * Our Clients * Central Banks * Consultants * Corporate Pension Plans * Defined Contribution * Endowments and Foundations * Healthcare * Insurance * Public Pension Plans * Sovereign Institutions * Taft-Hartley * Strategies * Strategies * Explore by Asset Class * Equity * Fixed Income * Liquidity Solutions * Alternatives * Multi-Asset * Explore by Solution * ESG & Impact Investing * Outsourced CIO * Pension Solutions * Workplace Retirement Solution * Insights * Insights * Perspectives * GSAM Connect * All Insights * Goldman Sachs Global Investment Research * About Us * About Us * Overview * News and Media * Stewardship * Contact Us * Careers * My Workspace * My Workspace * Please login to view your portfolio information and client reporting. Log in * * * Log in * United States Institutions * EN * Internal View SEARCH QUICK LINKS GSAM Connect Macro Insights GSAM Investment Outlook QUICK LINKS Market Insights Strategies Solutions Clients GSAM Insights NAVIGATING OPPORTUNITIES IN INVESTMENT GRADE CREDIT NAVIGATING FIXED INCOME March 1, 2023 | 9 Minute Read Share × EMAIL Note: Separate multiple email addresses with a comma or semicolon. Send Send me a copy -------------------------------------------------------------------------------- BOTTOM LINE We believe the deep and diverse universe of investment grade (IG) corporate bonds can provide investors with a stable source of income to achieve investment goals over various time horizons. At the same time, the asset class provides exposure to typically well-established companies, some of which are helping to drive the digital revolution, energy transition and inclusive growth. -------------------------------------------------------------------------------- THE CASE FOR IG CREDIT A HIGH-QUALITY SOURCE OF INCOME The US and European IG credit markets provide a healthy yield of 5.4% and 4.1%, respectively.1 We believe this is an attractive source of predictable income that can help investors achieve medium- to long-term investment goals (Exhibit 1). EXHIBIT 1: INCOME AND TOTAL RETURN POTENTIAL IS THE MOST ATTRACTIVE IT HAS BEEN IN MORE THAN A DECADE Source: Macrobond, ICE BoFAML. As of February 16, 2023. Pre-pandemic average reflects 2009-2019. CAPITAL PRESERVATION IN AN AGE OF UNCERTAINTY Investing in IG credit involves lending to resilient and often well-established companies that typically honor coupon and principal payments. In other words, the potential for capital loss or defaults owing to credit risk is low. And though the asset class is sensitive to duration risk, we believe its high quality is important in an age of uncertainty, and as investors face inflection points including a shifting economic landscape, new geopolitical alliances, accelerations in the adoption of new technologies, and the energy transition. A DEEP AND DIVERSE INVESTMENT OPPORTUNITY SET There are over $12 trillion worth of corporate bonds in the global IG credit universe comprised of bond issuers from 59 countries.2 This diverse geographical footprint means investors can capture outright and relative investment opportunities across regions. The investment opportunity set is also characterized by various bond maturities, allowing investors to achieve investment goals over various time horizons (Exhibit 2). Further, the broad spectrum of bonds available in the asset class enables investors to position along the credit curve depending on the interest rate outlook. For example, recession fears have led to inverted credit curves. As a result, short- and intermediate-maturity bonds exhibit a more attractive carry-and-roll profile relative to longer-dated bonds. EXHIBIT 2: INVESTORS CAN GAIN BROAD GEOGRAPHICAL EXPOSURE AND MOVE UP AND DOWN THE MATURITY LADDER Source: Bloomberg Global Aggregate Corporate Index. As of February 15, 2023. For illustrative purposes only. WHY NOW? TOTAL RETURN POTENTIAL IS AT A DECADE HIGH When yields were low—or even negative—high quality bond yields faced constraints from effective lower bounds during risk-off episodes. But after a painful adjustment to higher yields in 2022,3 IG credit now offers the most attractive level of income in more than a decade. In fact, total return potential is at the high end of its historical range, especially by the standards of the post-global financial crisis period. This higher yield—or income—can offer shelter during risk-off moves but also help to offset declines in bond prices should rates rise further. A slower pace of monetary tightening also implies lower rate volatility which is further supportive of “low beta” pockets of fixed income markets like IG credit. Macro resilience, firm credit fundamentals and supportive technicals have already helped IG credit deliver decent positive total returns year-to-date (Exhibit 3). As a result, we now consider IG credit spreads to be consistent with a fair level of carry and roll,4 a component of excess returns which tends to dominate over time. EXHIBIT 3: THE TIDE ON TOTAL RETURNS IS ALREADY TURNING Source: Macrobond, based on ICE BoFAML indexes. As of February 17, 2023. RESILIENCE TO DOWNSIDE GROWTH RISKS Except for the UK, most major economies look set to avoid recessions in 2023. But even if recessions are avoided, growth will likely remain below trend and earnings growth among corporates is decelerating. Against this backdrop, we would expect IG corporate bond issuers—whose credit fundamentals remain healthy—to prove more resilient relative to more cyclical assets like equities, in line with the historical trend (Exhibit 4). Momentum in credit rating actions has been positive for almost two years, with the notional amount of rising star bonds (upgrades from high yield) in the US market outpacing fallen angels (downgrades into high yield) for eight consecutive quarters.5 Even as balance sheet liquidity positions normalize towards pre-pandemic levels, we expect fallen angel activity to remain contained under most economic scenarios, including a hard landing. This is due to the strong starting point of balance sheet positions and compressed timeline of the current cycle which has—in many cases—kept late-cycle behaviors that can lead to a deterioration in credit quality at bay. As a result, the attractive yield delivered by the asset class largely stems from high quality issuers and is not being skewed higher by weaker credits on the verge of downgrade into the high yield market. Furthermore, the sector composition of IG credit indexes tends to be tilted towards defensive sectors like energy, defense, consumer staples and high-quality financials, further diminishing sensitivity to downside growth risks. Taken together, firm credit fundamentals and low cyclicality relative to other assets suggests limited spread widening in 2023—particularly in relation to prior growth downturns—as credit concerns remain in check. EXHIBIT 4: IG CREDIT TENDS TO EXHIBIT RESILIENCE DURING EQUITY MARKET DRAWDOWNS Source: Goldman Sachs Asset Management, based on Bloomberg indexes. SUPPORTIVE TECHNICAL DYNAMICS With most companies tapping capital markets to raise debt while interest rates were low, near-term refinancing needs are limited. For example, only around 16% of US IG corporate bonds mature in 2023 and 2024.6 A subdued new supply outlook combined with robust demand from yield-oriented investors paints a positive technical picture for the asset class. Demand for IG credit started to trend upwards at the end of 2022 as investors began to rotate back up the quality spectrum. Inflows into the asset class have maintained positive momentum into 2023 (Exhibit 5) and still-light positioning relative to pre-COVID levels suggests demand may rise further, prolonging the positive technical impulse for performance. EXHIBIT 5: INVESTORS REGAIN APPETITE FOR HIGH QUALITY FIXED INCOME ASSETS AMID HIGHER YIELDS Source: Morningstar, Goldman Sachs Asset Management. As of January 2023. WHERE ARE THE OPPORTUNITIES? In the absence of ever-lower interest rates and in the presence of greater macro uncertainty we expect active bond selection alongside dynamic sector allocation to be an increasingly important driver of alpha generation (Box 1). Below we highlight three high-conviction investment views: RELATIVE VALUE: LOWER QUALITY BONDS WITHIN A HIGHER QUALITY ASSET CLASS The BBB-rated part of the IG credit market is the lowest quality but largest and most diverse rating cohort. In our view, this deep investment opportunity set provides attractive income for solid fundamentals. Notably, BBB-rated issuers appear to be managing capital conservatively, and have maintained some cash flow after capital spending, dividend payments and share buybacks. SECTOR SPOTLIGHT: BANKING ON BANKS In 2022, excess savings deposits coupled with an increase in loan growth required banks to raise capital in line with regulatory requirements. The resultant increase in new bond supply saw corporate bonds issued by banks accumulate more spread premium relative to other sectors. In our view, spreads appear wide relative to resilient credit fundamentals; the banking sector is well capitalized, while robust lending standards and healthy private sector balance sheets implies loan books are in good shape. Further, many banks have built-up provisions in event of losses on loans. In addition, higher rates point to an improved outlook for net interest margins. The sector is also geographically diverse and can cater to various investor appetites, with investors able to gain access to the various parts of a bank’s capital structure. Overall, attractive valuations—as reflected by wide spreads—combined with strong fundamentals leads us to be overweight the bank sector. THEMATIC LENS: TELECOMS – INTERNET EXPLORER The internet has become an essential tool for powering the global economy, with lockdowns turbocharging demand for video conferencing and telemedicine alongside online gaming, education, and learning. As providers of high-speed internet, companies in the telecommunications (telecoms) sector are at the center of the digital revolution. High investment needs lead to high debt issuance within the sector, and in recent years, debt-funded M&A activity has placed many companies in the BBB-rating cohort. We seek to select bonds issued by companies with robust credit fundamentals that are well positioned for the industry’s crosscurrents. For example, in the past, we favored cable companies that delivered internet access through dial-up modem, as this reflected an improvement on phone line links provided by telecoms. However, today, we see greater investment potential in telecoms that are providing broadband internet via wireless fiber networks and 5G based wireless products. Fiber is arguably the leading technology currently capable of delivering the speed and capacity of internet required by households, businesses, and governments. It is also considered an energy-efficient solution to growth in internet traffic as more usage shifts towards mobile devices. According to company data and industry reports, Fiber is 80% more energy efficiency than copper networks used by cable providers, making it a key solution for helping the telecom sector grow while reducing its carbon footprint (Exhibit 6). Indeed, the use of proceeds for a recent green bond issued in the sector are intended for fiber expansion. Some Telecom companies offer basic broadband internet access through Fixed Wireless Access (FWA), taking advantage of existing wireless spectrum holdings as opposed to a physical connection to the premises. This offering’s internet speed is not as fast as fiber or cable, though it can be more cost-effective. This price competition is leading incumbents to expand internet coverage in rural areas and disadvantaged areas, which we believe can help to narrow digital divides and advance inclusive growth. Looking ahead, we suspect the sector may encounter further disruption as new competitive technologies emerge and as the policy backdrop evolves. We stand ready to refresh our internet explorer investment tab accordingly. EXHIBIT 6: MORE CONNECTED DEVICES, MORE INTERNET DEMAND Source: Goldman Sachs Global Investment Research GS Sustain. As of August 16, 2022. BOX 1: THE NEW ALPHA-BET FROM GOLDILOCKS TO THE THREE BEARS In the last cycle, a ‘Goldilocks’ regime of not too high or too low growth and inflation allowed central banks to buffer—and elongate—the cycle. Indeed, the last US expansion was one of the longest on record. Furthermore, a wave of liquidity and a downtrend in interest rates helped to lift all assets, with limited performance dispersion both across and within asset classes. For example, corporate bonds in a particular sector generally performed in line with each other despite differences in company-level balance sheet positions. In 2022, this setup was disrupted by high inflation and aggressive monetary tightening. Going forward, even as inflation peaks and the pace of policy tightening slows, we think investors will need to navigate three bearish factors: 1. Higher inflation stemming from structural shifts such as de-globalization in goods and labor, demographic aging, decarbonization, and destabilization in geopolitics. 2. Tighter policy given firmer inflation and high government debt levels. 3. Growth volatility reflecting macro, political and policy uncertainty alongside the risk of supply side shocks in tight commodity markets. INVESTMENT IMPLICATIONS In our view, this backdrop will give rise to a new investment “Alpha-Bet” characterized by: 1. Greater bond-level dispersion that requires active security selection to distinguish borrowers based on their ability to adapt to slower economic and earnings growth, as well as a higher-for-longer inflation and rate environment. 2. More risk premium stemming from left-tail risks driven by economic, geopolitical and industry shifts which can give rise to tactical investment opportunities. 3. Shorter cycles which require a dynamic approach to asset and sector allocation.7 RELATED INSIGHTS slide 1 to 2 of 3 * January 9, 2023 | Fixed Income Macro Views NAVIGATING FIXED INCOME IN 2023 January 9, 2023 For investors, there has been no shortage of downpours in recent years. The multiple headwinds have created a challenging investment environment and an age of volatility. Stormy times can lead some investors to step off the racetrack to look for shelter in cash. Others, however, are adjusting to volatile conditions and stepping up—or considering—investments in fixed income. Read More * January 6, 2023 | Fixed Income Macro Views NAVIGATING EXTERNAL EM DEBT January 6, 2023 A tough macro backdrop caused by the pandemic, Russia’s invasion of Ukraine and tighter global financial conditions has placed pressure on emerging market (EM) sovereign borrowers in 2022. However, excluding sovereigns in distress, EM sovereign bond spreads are broadly unchanged year-to-date and have outperformed similar rated US corporate bond spreads. We believe this reflects resilience in the broader market, particularly among middle-income—and often larger—EM sovereigns. Read More * January 3, 2023 | Quarterly Investment Outlook BRING ON BONDS January 3, 2023 Over the past couple of years, a confluence of factors—a global pandemic, surging inflation, war in Europe, aggressive monetary tightening and a cost-of-living crisis—has rocked the boat for investors like never before. In 2023, we think some—but not all—of these headwinds will begin to abate. Learn more in our Fixed Income 1Q 2023 Outlook: Bring On Bonds where we discuss growth, inflation, monetary and fiscal policy, and more. Read More × Video Player Sorry, your browser doesn't support embedded videos. Media error: Format(s) not supported or source(s) not found Download File: https://www.gsam.com/content/gsam/us/en/institutions/market-insights/gsam-insights/2023/ 00:00 00:00 00:00 Use Up/Down Arrow keys to increase or decrease volume. START THE CONVERSATION Committed to providing you with the insights you need to build your practice. Let's Talk * OUR CLIENTS * Central Banks * Consultants * Corporate Pension Plans * Defined Contribution * Endowments and Foundations * Healthcare * Insurance * Public Pension Plans * Sovereign Institutions * Taft-Hartley STRATEGIES * Explore by Asset Class * Equity * Fixed Income * Liquidity Solutions * Alternatives * Multi-Asset * Explore by Solution * ESG & Impact Investing * Outsourced CIO * Pension Solutions * Workplace Retirement Solution INSIGHTS * Perspectives * GSAM Connect * All Insights * Goldman Sachs Global Investment Research ABOUT US * Overview * News and Media * Stewardship * Contact Us * Careers 1Source: Macrobond, ICE BoFAML. As of February 17, 2023. 2Based on the Bloomberg Global Aggregate Corporate Index as of February 21, 2023. 3The sharp rise in interest rates amid aggressive monetary tightening drove majority of the negative total return in IG credit markets in 2022. 4Carry reflects the expected total return (net of financing costs) of an asset beyond price appreciation. It is estimated by the yield differential (or ‘spread’) between a fixed income sector and a risk-free asset (typically a relevant sovereign bond yield). Roll refers to a change in spread from “rolling down” a credit curve over time. 5Source: Bloomberg, Goldman Sachs Global Investment Research. As of Q4 2022. 6Source: Goldman Sachs Global Investment Research 2023 Global Credit Outlook: There will be yield as of November 16, 2022 7See Fixed Income Asset Allocation: A Well-Balanced Approach for more details. Risk Considerations Mortgage-related and other asset-backed securities are subject to credit/default, interest rate and certain additional risks, including extension risk (i.e., in periods of rising interest rates, issuers may pay principal later than expected) and prepayment risk (i.e., in periods of declining interest rates, issuers may pay principal more quickly than expected, causing the strategy to reinvest proceeds at lower prevailing interest rates). Collateralized loan obligations (“CLOs”) involve many of the risks associated with debt securities, including interest rate risk, credit risk, default risk, and liquidity risk. The risks of an investment in a CLO also depend largely on the quality and type of the collateral and the class or “tranche” of the CLO. There is the possibility that the strategy may invest in CLOs that are subordinate to other classes. CLOs also can be difficult to value and may be highly leveraged (which could make them highly volatile). The use of CLOs may result in losses. Emerging markets investments may be less liquid and are subject to greater risk than developed market investments as a result of, but not limited to, the following: inadequate regulations, volatile securities markets, adverse exchange rates, and social, political, military, regulatory, economic or environmental developments, or natural disasters. Environmental, Social and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated. Disclosures Views and opinions are current as of February 24, 2023 and may be subject to change, they should not be construed as investment advice. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein. This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities. The website links provided are for your convenience only and are not an endorsement or recommendation by Goldman Sachs Asset Management of any of these websites or the products or services offered. Goldman Sachs Asset Management is not responsible for the accuracy and validity of the content of these websites. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. High-yield, lower-rated securities involve greater price volatility and present greater credit risks than higher-rated fixed income securities. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. 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Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. Investments in fixed income securities are subject to the risks associated with debt securities generally, including credit, liquidity, interest rate, prepayment and extension risk. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. 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