The past decade has been good for corporate bonds: interest rates have been kept low by a steady economic recovery (the second longest on record in the post-World War 2 era), and inflation has been muted. More importantly, the impact of enormous quantitative easing (estimated at more than $12-trillion) by the world’s largest central banks since 2008 has depressed rates. This has forced investors to hold riskier assets — such as corporate bonds — to secure a reasonable yield. Now, quantitative easing is abating: the US Federal Reserve is reducing its balance sheet and the European Central Bank is likely to do the same from 2019. The environment for corporate bonds remains benign with abundant liquidity, but we are worried we may face a nasty credit squeeze in the US. While we don’t believe that market tops or bottoms can be forecast in advance, we can take the temperature of a market and determine if it is running hot (high expectations accompanied by high valuations) or cold (the co...

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