Credit risk in today’s fixed income environment

03 mins 06 secs

Please login to access your playlists.
Share a link to this video

     American Funds video transcript: “Credit risk in today’s fixed income environment” 

Will McKenna: It seems like most eyes are on the Fed and rising rates. But also credit risk, as it turns out, may be the more important issue in 2019. I've heard you and the team talk about this. Tell us more. What do you see as the issues there, and how should investors be thinking about credit risk?

John Smet: I think a lot of companies followed the quantitative easing playbook. And if you think about interest rates going down, it encouraged people to reach out and grab for yield. So, companies could buy another company and issue a lot of debt — investment-grade debt or, in some cases, high-yield debt. Investors bought that at a very tight spread, and that was very attractive for the companies.

So, you have a lot of companies right now that issued a lot of debt, well-received by the marketplace. And now, they're looking at, “I've got $40 billion of extra debt,” “I've got $100 billion of extra debt — I'd like to de-lever my balance sheet.” Well, if you are going to go from a slower growing economy, and perhaps more volatility in spreads, it may be tough for those companies to do that, because they all want to de-lever, but we're a slow-growing, mature economy. And you have to refinance some of this debt every year. If you’ve got $100 billion in debt, you’ve got to come to market every year. And so, the market may not be that accepting.

So, I think we worry about that: large companies that may be downgraded with large debt from single-A to triple-B. And some companies may go from triple-B to on the edge of high yield. So, that transition we're seeing — there's a lot of debt and a lot of re-leveraging of corporate America. So, we worry about that.

And right now, we're not being paid that much. In the last few weeks, we're getting more yield premium, but really, we're not getting paid that much for the risk that we see in 2019, with more volatility, maybe higher bond spreads and big companies trying to de-lever. So, I think that the credit market — the investment-grade credit market — we see a lot of dangers there, and we just don't think we're getting paid for it right now.

Will McKenna: So, the idea is to upgrade and stay very high quality in that part of the world?

John Smet: Stay very high quality — and even owning Treasuries. Treasuries are probably our favorite investment right now.


Past results are not predictive of results in futures periods.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.

The return of principal for bond funds and for funds with significant underlying bond holdings is not guaranteed. Fund shares are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings. Lower rated bonds are subject to greater fluctuations in value and risk of loss of income and principal than higher rated bonds. Bond ratings, which typically range from AAA/Aaa (highest) to D (lowest), are assigned by credit rating agencies such as Standard & Poor's, Moody's and/or Fitch, as an indication of an issuer's creditworthiness.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation.

Content contained herein is not intended to serve as impartial investment or fiduciary advice. The content has been developed by the distributor of the American Funds mutual funds, which receives fees for distributing and servicing the funds.

Information provided on this website is intended for use by financial advisors with persons who are eligible to purchase U.S.-registered mutual funds.

Securities offered through American Funds Distributors, Inc.

Any reference to a company, product or service does not constitute endorsement or recommendation for purchase and should not be considered investment advice.

© 2019 Capital Group. All rights reserved.


Debt-heavy companies are looking to de-lever. Portfolio manager John Smet discusses the credit-risk implications for bond investors in today’s slower growing economy.