A Broader Approach to Investment-Grade Corporates

International Exposure Provides Diversification

Diversification away from U.S. issuers into global issuers is a key part of our positioning. We believe this international allocation can provide valuable exposure to credit cycles that are not as synchronized with the U.S. and may have further room to outperform. The number of non‑U.S. companies issuing investment‑grade debt in U.S. dollars has grown rapidly in the last few years, expanding the universe of corporates available for our analysts to source attractive relative value ideas.

We have a meaningful allocation to Asian investment‑grade corporates, which offer low correlation with the U.S. investment‑grade corporate market as well as a strong risk‑return profile. This exposure to Asian issuers is both defensive in terms of diversification as well as opportunistic as a potential source of higher risk/adjusted returns. Within the Asia region, we favor high‑quality issuers in the technology and telecommunications sectors. As with all other segments of the investment‑grade corporate bond market, we rely on the fundamental research of T. Rowe Price’s global network of credit analysts to select individual credits. We have analysts based in Asia who can conduct in‑depth, on‑site credit research.

ABS Add Stability and Incremental Yield

As another source of high‑quality diversification, we have an allocation to asset‑backed securities across our investment‑grade corporate portfolios. ABS are generally high‑quality and relatively stable—important defensive characteristics—while also providing some incremental yield over U.S. Treasuries. In addition, because consumer loans form the collateral for most ABS, they are less exposed to the U.S. credit cycle than investment‑grade corporate bonds.

One segment of the ABS market that we currently favor is whole‑business securitisations (WBS), which have characteristics of both ABS and corporate bonds. Like corporates, WBS do not amortise principal. The collateral backing WBS is generally a first‑priority interest in a company’s primary revenue‑generating assets—hence the “whole business” name. Quick‑service restaurant companies are typical WBS issuers, with the majority of the collateral backing the deals consisting of franchise fees and royalties. The cash flows from this collateral tends to be very stable, boosting the credit quality of the bonds. We have positions in the highest‑conviction WBS ideas from our securitised credit analysts. Exposure to BBB rated WBS can provide incremental yield over their similarly rated corporate counterparts.

Economic Acceleration Presents Upside Risk

We believe that the most meaningful risk to our broadly defensive positioning is an unexpected acceleration in the U.S. economy. While this scenario seems unlikely given the increasing trade war tensions and the fading effects of the 2018 tax cuts, an abrupt pickup in economic growth could extend the credit cycle and allow riskier, longer‑maturity corporates to outperform more conservative credits. We think that superior security selection from our global credit analysis team should help mitigate this risk.

WHAT WE’RE WATCHING NEXT

We are closely monitoring developments in the U.S.‑China trade conflict—and the Federal Reserve’s reaction to the economic pressure caused by the uncertainty surrounding the situation—to anticipate whether the U.S. economy will avoid a prolonged slowdown. The Fed cited the drag from the trade conflict as a factor in its decision to lower interest rates in July, its first cut since 2008.