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James Crombie, a Bloomberg markets live reporter and strategist, highlights a significant issue facing credit investors: an “America First” approach that could be limiting their returns and exposing them to unnecessary risks. As the American economy begins to slow and political uncertainties rise, this home bias towards U.S. assets becomes increasingly problematic. With over 57% of the high-grade index and 62% of the junk bond market tied up in the U.S., investors are turning a blind eye to more profitable and diverse opportunities abroad.
The credit market is witnessing a pivotal shift; U.S. assets, traditionally seen as a safe harbor, are now underperforming in comparison to their global counterparts. Notably, European and Asian markets are presenting attractive options. The European Central Bank (ECB) is gearing up for rate cuts that could enhance the appeal of investment-grade bonds in the region, presenting a favorable contrast to the stagnating U.S. Federal Reserve policies. Moreover, the promising performance of Asian junk bonds in U.S. dollars, especially those betting on the Chinese government’s intervention in the real estate sector, indicates significant potential for gains. These markets, despite their inherent risks, offer a spread and quality that U.S. securities currently lack.
Emerging markets, particularly in commodity-rich countries like Mexico and Brazil, are also drawing attention due to their superior returns compared to U.S. assets. The political risks that were once a deterrent are now seen in a new light, as U.S. political volatility seems to match that of emerging markets. Furthermore, the stressors on U.S. credit investors, including potential defaults and economic downturns, underscore the need for geographic diversification. In overcoming home bias, investors face challenges such as liquidity constraints and currency hedging costs, yet the benefits of a diversified portfolio — both in terms of risk management and potential for higher returns — are undeniable.
Despite the evident attractions of foreign markets, the liquidity and familiarity of U.S. assets will keep them as a central component of most portfolios. However, an overreliance on American securities, now seen as overvalued, could hinder investors from achieving optimal portfolio performance. Embracing geographical diversification not only serves as a hedge against U.S. market declines but also as a strategy for enhancing returns in an increasingly interconnected global economy. This shift in investment strategy, recognizing the value beyond U.S. borders, may redefine risk and reward landscapes for credit investors worldwide.
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