Vanguard favors high-quality credit as US economy nears 'turning point'
NEW YORK - Top U.S. asset manager Vanguard favors high-rated corporate debt over riskier high-yield companies' bonds as it seeks protection against the possibility a sharper-than-anticipated U.S. economic downturn caused by high borrowing costs, it said in a report.
Vanguard, which manages over $9 trillion in assets, expects the Fed to keep rates on hold for most or all of this year due to continued economic resilience, but is cautious about the prospects of high-yield bonds, for which it plans to keep a lower-than-average allocation over the next few months. Investment grade corporate bonds have seen hefty demand this year as investors searched for higher yields than those provided by safer government bonds. That has compressed investment grade credit spreads, a measure of the premium demanded by bond buyers of corporate debt over government paper.
Those spreads would widen if the economics conditions deteriorate, said Vanguard. However, total returns - which include interest payments and price changes - should be supported by a corresponding decline in interest rates as the Fed eases monetary policy to inject fuel into the economy.
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