Tightening of monetary policy will extend beyond just government debt and could negatively affect both investment-grade and high-yield corporate debt. For the riskier high yield, an upward move in interest rates should be taken as a sign of an improving economy. And it is an economy in which corporate profits are on the rise and default rates remain low, providing a bit of a cushion to the negative impact of higher policy rates.
For bond investors, a move to higher rates may not be the calamity once feared since the excessive demand created by central bank policies will continue to support fixed income markets. However, given the very low yields on offer across the fixed income spectrum, it will be more important than ever to take a selective approach when allocating to different fixed income positions.
Kerry Craig is global market strategist of JP Morgan Asset Management
