What themes will drive the performance of quality bonds in 2021?

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Matt Brill
Head of NA Investment Grade

Investment outlook

Outlook 2021

The key themes driving the fixed income markets have fundamentally changed since 2020. We cover several updates for investors to consider throughout 2021.

Follow the Fed: The US Federal Reserve intends to keep interest rates low for the foreseeable future and support the market plumbing: investment grade credit. While the Fed has pulled out of direct buying of businesses, we believe any economic setback will prompt the Fed to support quality credit (the lifeblood of business lending) and support the economy.

Salvage trade: The economy is expected to rebound from the COVID-19 pandemic in 2021 and could see gross domestic product (GDP) growth of 6%, according to research by Invesco’s Investment Strategy team compiled on December 31. This is positive for investment grade credit – and especially for credit which is more sensitive to economic expansion, such as cyclical consumption. We are optimistic about sub-sectors, including travel and recreation, which we believe will benefit from the improvement and openness of the US economy. We remain overweight in areas that we believe will see credit spreads tighten as the economy recovers during the year.

Overall negative returns: There is still about $ 17 trillion in negative yielding debt in the world. As a result, foreign investors’ search for yield leads them to the US investment grade corporate market. While the U.S. investment grade market only accounts for about 13% of the global bond market, it accounts for almost 40% of all market returns.1 The size, liquidity and higher credit ratings of the US market are attractive to foreign investors, and we believe these flows will continue. This is another reason to overweight the investment grade market.

Residential vs commercial: We favor the residential mortgage market, including agency and non-agency mortgages, as the US real estate market remains extremely strong and most borrowers are financially healthy. We anticipate that the growing trend towards remote working will lead to increased demand for larger homes with outdoor space compared to smaller multi-family units. We expect that a weak supply of the former will put upward pressure on house prices and benefit residential mortgages. While it’s too early to tell how big the remote working trend will be, struggling commercial properties are unlikely to see a pickup in tenant demand anytime soon, and there is evidence that the lack of demand is making it. part of a longer term structural trend.

Corporate debt reduction: After borrowing a record $ 1.8 trillion in 2020, quality U.S. corporations no longer need excess cash to survive the pandemic. Businesses have learned to adapt to these changing and difficult economic times by choosing to start repaying their debts. That shift has already started, with record “tenders” or corporate bond buybacks at the end of 2020. We expect borrowing to drop sharply to $ 1.1 trillion in 2021. In addition, rating agencies are looking for companies to reduce their debt. or be downgraded. We believe this additional pressure will result in a significant reduction in overall leverage in 2021. This will benefit credit spreads from a fundamental (less leverage) and technical (less supply) perspective.

Merchandise rebound: Accelerating economic trends are expected to lead to higher commodity prices. We believe there are opportunities in the metals sector, as well as parts of the energy market, such as pipelines, which should perform well as commodity prices improve relative to market prices. Volatile and very low prices of 2020. That said, the new US administration may present some challenges for the oil and gas sectors, so stock selection will be paramount.

Relaunch: We expect inflation to pick up in the second quarter of 2021. While this is likely transient, the treasury market may fear that the Fed will withdraw monetary support sooner than expected. While we don’t expect the Fed to take this step, we do expect increased interest rate volatility. To start the year, 10-year Treasury yields have risen, recently rising above 1.3%. It is not clear how the market will react when the inflation impressions are actually realized in the spring and summer, as the high rates have already been built in, but we expect more rate volatility. High yield bonds and emerging market bonds trade on the dollar and no spreads, making them less sensitive to interest rate volatility. We have positioned the portfolio with a greater exposure to bonds quoted in dollars, which should offer less empirical duration compared to the modeled duration.

Crosses: The year 2021 is the year of the upgrade. We believe that through selected themes and security selection, we can improve total return by buying high yield bonds before they move to investment grade. Once they are upgraded, the universe of buyers expands to pensions and insurers, allowing significant price appreciation. We believe the market will see $ 50 billion or more in upgrades in 2021, led by tech and home builders.

We were able to generate strong returns for our clients in 2020 through active management, and we now see plenty of opportunities for fixed income in 2021. We will work hard to ensure that we are in a prime position to capitalize on them. left.


1
Bank of America, Global Research, as of November 30, 2020.

Before investing, investors should carefully read the prospectus and / or the simplified prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund (s), investors should ask their financial professional for a prospectus / summary prospectus or visit invesco.com/fundprospectus.

This does not constitute a recommendation of any investment strategy or product for any particular investor. Investors should consult a financial professional before making any investment decision. Past performance does not represent future results.

Fixed income investments are subject to the credit risk of the issuer and to the effects of changes in interest rates. Interest rate risk refers to the risk that bond prices typically fall when interest rates rise and vice versa. An issuer may not be able to pay interest and / or principal, resulting in a decline in the value of its instruments and a decline in the issuer’s credit rating.

Debt securities are affected by changes in interest rates and changes in their effective maturities and credit quality.

The risks of investing in securities of foreign issuers may include fluctuations in foreign currencies, political and economic instability, and foreign tax issues.

The investment techniques and risk analysis used by the portfolio managers may not produce the desired results.

All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This should not be interpreted as an offer to buy or sell financial instruments and should not be taken as the sole factor in an investment decision. As with all investments, there are inherent risks associated with it. This should not be taken as a recommendation to buy an investment product. This does not constitute a recommendation of an investment strategy for any particular investor. Investors should consult a financial professional before making any investment decision if they are unsure whether an investment is suitable for them. Please obtain and carefully review all financial documents before investing. Opinions expressed are based on current market conditions and are subject to change without notice. These views may differ from those of other Invesco investment professionals. Past performance does not represent future results. This portfolio is actively managed. The securities and characteristics of the portfolio are subject to change.

All information is from Invesco and as of 01/31/21, unless otherwise noted. Distributors Invesco, Inc. 2021

CPB-INSI-1-F 03/21 NA2458

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