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Furthermore, since 2016 BB bonds have realized a 0% default rate, according to J.P. Morgan (bonds as rated 12 months prior to default). In light of the improving fundamentals we believe defaults are likely to stay at or near this level for a while, meaning BBs offer an attractive yield opportunity on a loss-adjusted basis. Credit fundamentals in the U.S. are generally improving, driven by faster economic growth and higher corporate earnings.
Today, a top-of-mind concern for many investors, especially investment grade credit investors, is the potential for rising rates to erode their fixed income returns. While the crossover sector has a similar risk/return profile as investment grade corporates, it has less than half the correlation to Treasuries: 34% versus 71% for pure investment grade corporate bonds. Crossover bonds can help diversify a bond portfolio amid rising rates.
Many investors seeking yield in the current low interest rate environment are reluctant to take on high risk. Corporate crossover bonds, which straddle the line between the investment grade and high yield bond markets, may offer a solution.
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