Bond pain ahead

US credit spreads, as measured by the yield difference between investment-grade BAA corporate bonds and the 10-year US Treasury, currently stand at a three-decade low. Historical patterns reveal that such levels of market complacency regarding corporate default risk, coupled with an uptick in interest rates, have historically precipitated increased corporate defaults and a subsequent repricing of risk. At ECP, our approach is centred on mitigating these risks through prudent investment strategies. We prioritize allocations towards high-quality issuers and maintain a focus on shorter durations, thereby positioning our portfolios to withstand potential market fluctuations.