BlackRock recommends investing in credit: no need to rely on capital gains, interest income is already "sweet enough"

BlackRock said that continuously investing in the credit market to generate returns is the best way to deal with current market volatility. Analysts at BlackRock wrote in their quarterly fixed income outlook report released on Wednesday that despite geopolitical uncertainties forcing many investors to adopt a wait-and-see approach, this volatility also creates opportunities for patient capital, especially when prices diverge from fundamentals. James Turner, Global Head of Fixed Income for Europe, the Middle East, and Africa at the company, stated in an interview, "Given where yields are currently, fixed income returns are at their highest sustained levels in nearly two decades and can provide significant compounding returns." The yield for investment grade corporate bonds in the Eurozone is around 3.6%, compared to an average yield of less than 2% over the past decade. Although credit spreads in Europe have narrowed to levels seen before the Iran conflict, BlackRock believes that the return of healthy coupon income in the credit market, rather than price or spread fluctuations, is an underestimated driver of yield growth. Turner added, "The environment now is more normal, closer to what fixed income investing is supposed to look like. In fixed income investing today, you no longer need to rely on capital appreciation to achieve good total returns." The report highlighted that corporate fundamentals are supporting the market, with issuers adopting a more cautious approach to balance sheet management. This has led to positive refinancing, lower leverage ratios, and healthy profit margins, making widespread downgrades or defaults less likely. BlackRock believes that while conflicts have intensified uncertainties in economic, monetary, and fiscal prospects, aggressive interest rate hikes seem unlikely. Turner stated, "We don't expect a recession in our base case, which in itself should suppress spread widening. Most investors see spread widening at this point as more of a buying opportunity than a concern." Given the uncertainty surrounding the economic growth and policy rate path, BlackRock emphasizes the importance of active duration management, with the most attractive investment opportunities being in 2 to 5 year bonds. The global asset management company is more cautious in its investments in long-term bonds.