AAM Senior Portfolio Manager Daniel Byrnes, CFA discusses corporate debt concerns with AGRiP (Association of Governmental Risk Pools). Dan details that conversations regarding portfolio review are easier to have “when there’s not a lot of panic out there [in the market].” Read the full post below, and be sure to check out AGRIP’s Fall Forum 2019 to hear Dan deliver a full session on bond investments!

Daniel Byrnes, CFA – Senior Portfolio Manager, Vice President, and Principal

This post was originally published on AGRiP’s website.

“Rising business debt and its potential risks to the economy should prompt pools to take another look at the credit risk in their investment portfolios.

Daniel Byrnes of AAM cites a recent speech by Federal Reserve Chairman Jerome Powell on the possible dangers posed by increasing business debt. While not reaching the level of concern that subprime mortgages posed a dozen years ago, Powell said that “business debt has clearly reached a level that should give businesses and investors reason to pause and reflect.”

Powell went on to say that “if a downturn were to arrive unexpectedly, some firms would face challenges.” He noted that the debt is not only plentiful, it’s riskier debt as well. “Among investment-grade bonds, a near-record fraction is at the lowest rating—a phenomenon known as the ‘triple-B cliff.’ In a downturn, some of these borrowers could be downgraded into high-yield territory,” Powell said. That in turn would require some investors to sell their holdings, as the bonds would no longer be investment grade.

That’s a potential concern for pools that have made corporate bonds the centerpiece of their investment policies. It may translate to greater volatility than they have come to expect when their assets are marked to market, says Byrnes.

He suggests that pools would do well to make sure that their investment policies are set up in a way that the pool is not a “forced seller” of the bonds they hold.

“You want to be thoughtful about how you would approach selling if there’s a downgrade; if you sell immediately following a downgrade you would be selling at one of the weakest points,” he said.

Byrnes notes that in times of stress, it’s not always possible to get an investment committee together to approve holding downgraded securities, and the markets won’t wait for them. The best policies, he says, are those that have language providing a little flexibility, perhaps allowing a small percentage of the portfolio to be downgraded without a forced sale, giving pools time to make a considered decision.

He recommends that pools work with their investment advisers to understand the risk currently in their portfolios and ensure their investment policies “are really well diversified.”

“It’s easier to have these discussions when there’s not a lot of panic out there,” says Byrnes.

Byrnes will deliver a session on bond investments at the AGRiP Fall Forum 2019, October 6-9 in Cleveland, OH. His firm, AAM, supports AGRiP as a QEI patron.“

Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

Disclaimer: Asset Allocation & Management Company, LLC (AAM) is an investment adviser registered with the Securities and Exchange Commission, specializing in fixed-income asset management services for insurance companies. Registration does not imply a certain level of skill or training. This information was developed using publicly available information, internally developed data and outside sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated and the opinions given are accurate, complete and reasonable, liability is expressly disclaimed by AAM and any affiliates (collectively known as “AAM”), and their representative officers and employees. This report has been prepared for informational purposes only and does not purport to represent a complete analysis of any security, company or industry discussed. Any opinions and/or recommendations expressed are subject to change without notice and should be considered only as part of a diversified portfolio. Any opinions and statements contained herein of financial market trends based on market conditions constitute our judgment. This material may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different than that discussed here. The information presented, including any statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Although the assumptions underlying the forward-looking statements that may be contained herein are believed to be reasonable they can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. AAM assumes no duty to provide updates to any analysis contained herein. A complete list of investment recommendations made during the past year is available upon request. Past performance is not an indication of future returns. This information is distributed to recipients including AAM, any of which may have acted on the basis of the information, or may have an ownership interest in securities to which the information relates. It may also be distributed to clients of AAM, as well as to other recipients with whom no such client relationship exists. Providing this information does not, in and of itself, constitute a recommendation by AAM, nor does it imply that the purchase or sale of any security is suitable for the recipient. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, inflation, liquidity, valuation, volatility, prepayment and extension. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.