A Fixed Income Opportunity for the Current Market

October 12, 2020
Kevin Flanagan, WisdomTree's Head of Fixed Income Strategy, provides an update for fixed income investors and discusses how the WisdomTree U.S. High Yield Corporate Bond Fund, WFHY, can help mitigate potential default risk going forward. 

Kevin Flanagan: Well, certainly one of the big, noteworthy headline makers this year has been the Federal Reserve. That's usually no surprise, but there have been some differences in 2020 than what we've seen in the past. Obviously, the Fed reacting as they did in a proactive stance probably helped us avoid another financial crisis. But more importantly, what we've seen recently is a new policy framework from the Fed, where they're going to let things run hot. In other words, they're going to embrace average inflation targeting. And what that means is that since inflation has been below their 2% threshold, they are now going to wait for inflation to hit 2% and above and let the economy run longer than would normally be the case before they would consider raising interest rates or tapering on their balance sheet.


So, what does that mean for the Fixed Income investor? Where do we see opportunities? Well, one of course would be in the high yield arena. We do think that high yield sector could benefit from this new approach from the Fed going forward, and I think it's important to also screen for quality. If you look at what happened in corporate spreads this year, what you found out in prior episodes where we saw peak widening in high yield and investment grade corporate spreads, they occurred about 11 months before default rates peaked. So, we are expecting to see default rates move higher as we move along in the months ahead. So, screening for quality, tilting for income are going to be important. And that's where the WisdomTree U.S. High Yield Corporate Bond Fund comes into play, ticker WFHY, where we screen for quality using public issuers, using free cash flow as a way of screening out and trying to mitigate or prevent potential default risk going forward. One other aspect is that tilting for income. So, I think what's important is investor is looking at a Core Plus solution for their portfolio that can provide, hopefully, a potential for total return and income. Thanks for tuning in everybody. Have a great day.


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