Record-High Levels of Corporate Borrowing Raise Questions About the Health of Company Balance Sheets
Investment-grade corporate bonds overall remain at fair value, especially after a sharp correction in the energy sector. However, increasing leverage, resurgent mergers and acquisitions activity and the possibility of rising interest rates are all reasons for investors to be cautious and selective.
Mortgage-backed securities continue to trade at relatively tight spreads as the market loses one of its largest buyers, the Federal Reserve. Valuations are lofty for high-quality mortgage bonds, but they do offer slightly higher yields than Treasuries and they tend to hold up better in a rising-rate environment due to declining mortgage prepayment activity.
U.S. high-yield bonds have followed a similar pattern to investment-grade debt. But high-yield spreads are at valuation levels that make them somewhat more compelling as they widened significantly in the last six months of 2014, primarily due to trends in the energy sector.
As interest rates fell to record lows, corporate borrowing climbed to record highs. Much of the new debt has been issued to finance acquisitions, share buybacks and dividend payments. Investors should keep an eye on rising corporate debt levels, particularly when they are associated with large-scale M&A activity.
Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses or the collective investment trust's Characteristics statement, which can be obtained from a financial professional, Capital or your relationship manager, and should be read carefully before investing.
Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.