Keep Your Fixed-Income Focus On Credit Spreads Compared To Yield Curve Inversion
- Philip Prough, CFP®, CIMA®
Yield curve inversion or credit spreads? Which is more worrisome to me? In the current environment, I’ll vote for credit spreads. A yield curve inversion is important to follow, but is not necessarily a predictor of stock market declines.
For C&N, the credit spread tightening is more worrisome. Why? As we’ve been stating for most of this year, the fixed-income market is as elevated - if not more than - the equity market. The tightening of credit spreads has reduced the risk/return scenarios within fixed-income dramatically. In essence, if we are not being paid the appropriate yield for taking on credit risk, then why would we want to own anything but higher quality bonds? Including Treasuries?
The statistics on credit spreads is revealing. The thirst for yield in the fixed-income markets over the past two years have driven spreads to very tight levels. If things go bad in the market (stock or bond), higher quality bonds may shine.
Our conclusion: stay diversified within fixed-income and focus on credit spreads. Your high-quality bonds may not produce the yield you desire, but it’s likely they will perform better when things get rocky, which may or may not happen due to a yield curve inversion.
Some products are not FDIC insured or guaranteed, not a deposit or other obligation of the bank, not guaranteed by the bank and are subject to investment risk, including the possible loss of the principal amount invested and are not insured by any other federal government agency.
Philip is the Chief Investment Strategist and oversees the investment unit of the Trust and Financial Management Group. His responsibilities include the oversight of investment strategies, investment analysis and manager selections. Philip joined C&N in 2000. He was previously responsible for the delivery of C&N’s financial services, including the sales and service of Trust, Brokerage and Insurance services. He also retains administration duties for client accounts.
Prior to joining C&N, Philip’s experience at C&N, Prough Insurance Agency and Parente Randolph provided him with valuable skills and insight to lead his team to success at C&N. Philip’s driving philosophy is that “providing a deep, knowledgeable team gives our clients assurance that we have a sustainable support network to meet their changing financial needs. But it’s our personal service that demonstrates our clients will always be our primary focus.”
Philip is an honors graduate from Lycoming College, receiving his Bachelor's of Arts degree in Accounting. He received his Master of Business Administration from Colorado State University in 2012 and has held the designation of Certified Financial Planner® practitioner since 2003. He also holds various securities and insurance licenses.