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In a low yield world with fewer and fewer bargains, conservative investors are finding themselves in a bind.  Treasuries appear increasingly risky given the rising inflation risks.  High yield is no longer the bargain it was in recent years.  Municipal bonds are in the midst of a potential crisis.  So what’s a conservative income investor to do?  Credit Suisse recommends that low risk tolerance investors stay in short duration investment grade corporates while those with a higher tolerance move out into the high yield market:

“In our general strategy we continue to overweight higher yielding bonds that should benefit from an ongoing economic recovery, improving funding conditions and retreating default rates. For investors with low risk tolerance we primarily recommend investment-grade corporate bonds. For investors with higher risk tolerance, we recommend selectively adding exposure to high yield, bank subordinated, corporate hybrids and lower rated emerging market bonds.”

  • We reiterate our preference for higher yielding bonds. We continue to like emerging market and high yield bonds as we expect them to be well positioned to profit from an ongoing economic recovery and falling default rates.
  • For investors with low risk tolerance, we advise to focus on short to medium-maturity bonds from selected A and BBB rated companies.
  • In USD, our preferred bond maturity range is 1–3 years for AAA/AA rated bonds and 1–5 years for A/BBB rated (senior) bonds. In EUR and GBP we favor 2–4 years for AAA/AA rated bonds and 2–6 years for A/BBB rated bonds. In CHF, our recommended maturities are 3M Libor to 2 years for AAA/AA rated bonds and 3M Libor to 4 years for A/BBB rated bonds.

Fixed income investors will also be interested in Jeff Gundlach’s relatively conservative outlook.

Source: Credit Suisse

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