There is very little perception of broad economic risk on a forward-looking basis, as indicated by Option-Adjusted Spreads (OAS) on the U.S. High Yield Corporate Bond market. As the accompanying chart illustrates, recent OAS metrics are significantly lower than their decades-long averages. This is the case for both B-rated and BB-rated High Yield U.S. Corporate Bonds.
Since 12/31/1996, the long-term average OAS for B-rated bonds was 5.31%. As of 10/18/2024, it's 2.85%, or 46.33% lower than the long-term average. Similarly, BB-rated paper held a long-term OAS average of 3.50% while its recent print fell to 1.78% (49.14% lower). The only question that matters is whether our current economic backdrop lends itself to being nearly half as risky to assets relative to the long-term average. Given the several extreme economic issues related to: record-breaking U.S. government debt and payments; sustainably higher interest rates; rising consumer loan delinquency; and asset bubbles begotten by an extended period of record-low interest rates, I would say it doesn't track that we'd be sitting at less than half the perceived long-term average risk spread for too long.
Visually, scanning over the past two plus decades within the chart, there is a comforting cyclicality on display. Spikes higher were followed by periods of spreads trending lower and lower, until snapping back higher with some catalytic economic event. Is this time different? Though history may not precisely repeat itself, it often does rhyme.
As for our portfolios, the Cash and Fixed Income allocations across the ACGM Total Portfolio Solutions Suite™ have continued their overweights relative to global equities by its maximum allowable, per strategy mandates. Short-term U.S. Treasuries are currently favored over long or intermediate duration, as well as investment grade over non-investment grade. Non-U.S. equities are nearly equally weighted to U.S. equities - across the capitalization landscape - leaning far away from the embedded concentration risk that is the S&P 500 Index (market cap weighted).
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