‘Curb Your Enthusiasm’ for High Yield, RBC Strategist Says

Craig Bishop, lead strategist of RBC Wealth Management’s U.S. Fixed Income Strategies Group, thinks it’s time for advisors and their clients to curb their enthusiasm for high yield.

RBC has about 2,000 advisors, and Bishop‘s team helps set RBC Wealth Management’s views on rates and credit, informing the firm’s guidance on asset allocation and portfolio construction.

Bishop recently visited ThinkAdvisor’s New York office to discuss his thoughts on the interest rate environment and why investors should stop chasing yield.

“Ever since the end of the great recession back in ’08 and ’09, and when the economy began to turn up, it’s been the natural inclination of analysts and/or professional investors and individual investors to think that interest rates were going to soon begin to rise again,” Bishop told ThinkAdvisor. “And they haven’t.”

And Bishop doesn’t think they will anytime soon. His view has been for some time that “we’re in a lower-for-longer interest rate environment,” and he said he doesn’t see anything on the horizon that’s going to change that.

“You look at a world of slow global growth, low inflation, central banks — outside of the Fed — still remaining relatively accommodative, and I think to us that spells this continuation of this lower-for-longer interest rate environment,” he explained.

This low-rate environment does pose challenges for investors that want to earn more on their money. Investors have often done that by chasing yield or taking on additional credit risk or duration risk, which Bishop thinks has had an effect on the market.

“This demand for higher yield has caused spread relationships between high-yield and investment-grade credits to narrow significantly,” he said.

Bishop thinks we’ve reached the point where investors should start paring down their exposures to lower-rated credit.