The recent Jana Investment Advisors conference brought many esteemed global professionals together. I was fortunate to interview Steve Boothe, Head of Global Investment Grade Credit at T.Rowe Price who has US$1.7 trillion in funds under management.
1. Can you tell us three issues you see influencing credit markets right now?
Bankruptcies among small and medium-sized private business are ticking higher, signalling growing credit stress in certain parts of the economy. While this trend is not an immediate concern for public, high quality credit, it remains a risk we are closely monitoring.
The proliferation of passive credit investing is raising concerns. It distorts issuer incentives, as larger and more indebted companies increasingly dominate index composition. At the same time, it is reducing compensation for bearing liquidity risk in public markets, creating a false sense of trading liquidity.
Reaccelerating inflation in both the US and Europe as we head into 2026, introducing a degree of monetary policy uncertainty.
2. Is Trump’s harassment of the US Fed one of those?
No. I would suggest that the US administration’s criticisms of the Federal Reserve are more noise than substance at this point. The individuals being discussed as potential successors to Jerome Powell and other board members are well qualified. While some may bring heterodox views on a number of topics, I do not believe this poses a meaningful risk to high quality credit.
3. What is your outlook for US interest rates? Where do you expect rates to be in 12 months’ time?
We expect US rates to drift higher over the next 3-4 quarters. Despite today’s soft payroll report, the combination of ongoing fiscal support and a potential pickup in capital spending should support higher treasury yields and a steeper treasury curve. We also anticipate a modest rise in inflation as we approach year end.
4. How do you feel about taking duration for additional yield?
We prefer the intermediate segment of the corporate credit curve. For total return investors, we recommend caution with longer dated credit given our outlook for higher interest rates.
Also read: Playing With Numbers
5. Credit spreads are tight, is there room for further tightening?
While we acknowledge that the excess return relative to treasuries profile for credit is not particularly compelling on a directional basis, our bias is that spreads will remain well anchored. We also see potential for additional tightening, supported by resilient fundamental and persistent demand for high quality yield.
6. At the moment, generally speaking, do you prefer high quality IG or are you happy to take on additional risk lower down the IG credit rating spectrum?
While we maintain a constructive view on high quality credit, we believe the current BB vs. IG relationship is attractive and are comfortable moving down in quality in select issuers and sectors. We also favor high quality securitized credit as a diversifier within corporate credit portfolios.
7. As a past analyst, I always looked at the BBB and BB-rated companies and thought this was where a good analyst could add value by picking those that might be downgraded or upgraded.
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- How do you feel about the spread differential between these levels?
See above
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- Are there many BBB rated companies that you think should be sub IG?
We currently have few concerns about downgrades from BBB issuers of consequential size, and do not believe any one particular sector is overly exposed to downgrade risk.
8. What are your favored sub sectors?
Energy: meaningfully improved capital allocation polices across the sector, commodity price support, and an M&A cycle that will benefit smaller issuers.
Subordinated financials: we see room for additional subordinated to senior spread compression.
European IG vs. US IG: We see room for additional spread compression between the two markets.
9. Are portfolios fully invested, or is there cash on the sidelines, waiting for the next dislocation?
Market wide positioning remains fairly light. Robust demand for recent primary issuance suggests positioning has extended somewhat relative to recent history, but overall light positioning serves as a tailwind for valuations.
10. Can you tell us three things that would change your credit outlook?
- Weaker fiscal support. Should the US fiscal impulse decelerate, this will introduce fundamental headwinds to credit and pressure risk assets in general.
- Sustained outflows from passive products that leads to a trading liquidity event.
- Inflation re-accelerating into 2026, approaching 4% on a headline basis.
