IN BRIEF

Since the collapse of interest rates in the aftermath of the financial crisis, investment grade (IG) fixed income supply—taking advantage of low yields—and investment grade demand— eager for any yield at all—have both surged. Now, as global policy rates begin to diverge, we believe non-U.S. investors should refocus their attention on U.S. corporate investment grade opportunities:

  • Non-resource sectors in the U.S. are thriving even as growth lags in the rest of the global economy.

  • Inspite of rising leverage in U.S. industrials, corporate balance sheets are relatively clean, with debt service manageable.

  • The U.S. corporate bond markets are the world’s deepest and most diverse.

Hedged against currency and U.S. interest rate risks, an allocation to U.S. investment grade corporates can and should constitute an important component of a comprehensive fixed income investment strategy, in our view.

The physics of debt

Like the natural universe, the fixed income universe is expanding. Global debt markets have tripled in size since the turn of the century, reaching $98 trillion in estimated amounts outstanding. This exceeds the growth of global GDP, which has doubled to $78 trillion over the same period. The market’s composition has fluctuated as it has grown. In 2000, government and financial bonds made up roughly equal parts of the whole—43% and 42%, respectively.

As the credit bubble swelled, financials predominated, constituting 53% of the global total, compared with government’s 36% share. The roles have since reversed so that today government debt makes up 46% of the total, while financial’s share has shrunk to 40% (EXHIBIT 1). Corporate debt accounted for about 14% in the years at the beginning of the period. As the financial bubble inflated, its share contracted—to 9% by the end of 2007.

Corporate issuance has since recovered and now stands at 13% of the expanded total.

Non-financial’s share of global debt has held relatively steady through the financial crisis and the explosive growth that followed

EXHIBIT 1: GLOBAL DEBT SECURITIES MARKET
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Source: Bank of International Settlements (BIS) Statistics—Total debt securities outstanding; data as of December 6, 2015.

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