Spreads have taken a round trip, having widened dramatically at the start of the coronavirus crisis but have since narrowed significantly; recovery should squeeze spreads tighter but investors will need to rely more on identifying opportunities through good credit analysis and security selection.
Effective vaccines should allow economies to reopen and earnings and cash flows to recover and this should accelerate as 2021 progresses, allowing balance sheets to begin to improve.
Companies in the energy sector may have to run with more conservative balance sheets not just because the oil price may remain low but because the costs of financing are likely to rise as more ESG-led investors refuse to lend to these companies.
Inflation is a potential concern. While modest inflation is often good for corporate revenues the very low yields on government bonds means inflation may cause volatility in the underlying government bond market that could feed into volatility among corporate bonds.
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