Review of 1H 2023

Investment grade markets started 2023 off with strong returns. The Bloomberg US Corporate Bond Index posted a total return of 4.0% for the month of January. However, by the end of May the year-to-date return had slipped to just 2.8%.

The banking sector emerged as a large source of risk in first half of 2023 with several high profile bank failures in both the US and Europe. A combination of rapid interest rate increases that resulted in falling values of banks’ bond portfolios, large deposit flows among banks as depositors grew concerned about the strength of smaller banks and the prospect of lower earnings in an environment of higher interest rates drove credit spreads materially wider. At the same time, tightening credit standards and a weaker outlook for corporate earnings added to concerns of a possible recession later in the year. The end of the second quarter also saw volatility associated with the debt ceiling debacle, though fortunately this was resolved.

In this environment, we favor sectors that are less economically sensitive such as healthcare and utilities. At the same time, we are being selective in allocating to the banking sector as we expect the banking sector’s performance to lag as the economy slows and asset quality weakens. Regional banks typically hold more credit risk than larger and better diversified money center banks. We remain cautious on the REIT office sector as pressures remain and improvement in office occupancy rates appear to have stalled.

Outlook for 3Q 2023

We expect earnings growth to slow and credit metrics to deteriorate over the balance of 2023. Signs of this are already evident. Within the S&P 500 Index, median EBITDA growth slowed to 1% in Q1 2023 from 3.4% in Q4 2022 and 8% in Q1 2022, and the interest coverage ratio declined to 11.9x in Q1 2023 from its peak in Q2 2022 of 13.7x. Prolonged higher interest rates likely means higher borrowing costs resulting in further declines in debt coverage ratios in the absence of debt reductions.

Figure 1: S&P 500 Index Operating Margin

Against this backdrop, we are looking to avoid names that are over-exposed to floating rate debt and where credit ratings are toward the lower end of the investment grade rating spectrum, notably BBB- issuers. We have also noticed that the slowing earnings growth environment has begun to eat away at some of the rating buffers BBB issuers had added in recent years.  To that extent, BBB downgrade rates have begun to tick up. For example, the consumer products sector has seen several downgrades from Investment Grade to High Yield as they have struggled with rising input costs, changing consumer demand and supply chain issues. Holding bonds of issuers that are likely to experience credit downgrades has typically been a source of underperformance for investment grade investors.

Regional bank credit spreads reflect a large degree of distress and bank credit spreads are trading wide to industrials. Banks are the largest issuer group in the investment grade market. We expect banks to build out their term funding bases as new regulations that require banks to issue more term debt are rolled out. Issuance of bonds by banks are likely to present interesting opportunities as banks will likely need to offer compelling new issue concessions to attract buyers. At the same time, higher for longer interest rates are likely to create ongoing earnings pressures for banks and a negative equity market sentiment could weigh on the sector.

Lastly, reflecting our view that credit spreads are not currently reflecting the risk of weakening corporate fundamentals and higher downgrade risk, and elevated front-end interest rates presents a unique opportunity, we favor shorter maturity bonds where both yields and credit spreads appear attractive, especially those of the larger systemically important banks. At the same time, we are monitoring the trajectory of credit spreads; should credit spreads materially widen and the Federal Reserve reassess its interest rates stance due to pronounced economic weakness and/or inflation reverting to acceptable levels, we would reassess our investment stance and possibly increase our risk exposure.

Figure 2:  5-Year Credit Spreads: Regional Banks are Wide

Source Information

“Bloomberg®”, “Bloomberg Indices®”, Bloomberg Fixed Income Indices, Bloomberg Equity Indices and all other Bloomberg indices referenced herein are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the indices (collectively, “Bloomberg”) and have been licensed for use for certain purposes by MacKay Shields LLC (“MacKay Shields”). Bloomberg is not affiliated with MacKay Shields, and Bloomberg does not approve, endorse, review, or recommend MacKay Shields or any products, funds or services described herein. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to MacKay Shields or any products, funds or services described herein.

ICE Data Indices, LLC (“ICE Data”), is used with permission. ICE® is a registered trademark of ICE Data or its affiliates, and BofA® is a registered trademark of Bank of America Corporation licensed by Bank of America Corporation and its affiliates (“BofA”) and may not be used without BofA’s prior written approval. ICE Data, its affiliates and their respective third-party suppliers disclaim any and all warranties and representations, express and/or implied, including any warranties of merchantability or fitness for a particular purpose or use, including the indices, index data and any data included in, related to, or derived therefrom. Neither ice data, its affiliates nor their respective third-party suppliers shall be subject to any damages or liability with respect to the adequacy, accuracy, timeliness or completeness of the indices or the index data or any component thereof, and the indices and index data and all components thereof are provided on an “as is” basis and your use is at your own risk. ICE Data, its affiliates and their respective third-party suppliers do not sponsor, endorse, or recommend MacKay Shields LLC, or any of its products or services.


Availability of this document and products and services provided by MacKay Shields LLC may be limited by applicable laws and regulations in certain jurisdictions and this document is provided only for persons to whom this document and the products and services of MacKay Shields LLC may otherwise lawfully be issued or made available. None of the products and services provided by MacKay Shields LLC are offered to any person in any jurisdiction where such offering would be contrary to local law or regulation. This document is provided for information purposes only. It does not constitute investment or tax advice and should not be construed as an offer to buy securities. The contents of this document have not been reviewed by any regulatory authority in any jurisdiction.

This material contains the opinions of certain professionals at MacKay Shields but not necessarily those of MacKay Shields LLC. The opinions expressed herein are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and opinions contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Any forward-looking statements speak only as of the date they are made and MacKay Shields assumes no duty and does not undertake to update forward-looking statements. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of MacKay Shields LLC. ©2023, MacKay Shields LLC. All Rights Reserved. 

Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met.  Past performance is not indicative of future results.


This document is intended only for the use of professional investors as defined in the Alternative Investment Fund Manager’s Directive and/or the UK Financial Conduct Authority’s Conduct of Business Sourcebook. To the extent this document has been issued in the United Kingdom, it has been issued by MacKay Shields UK LLP, 80 Coleman Street, London, UK EC2R 5BJ, which is authorised and regulated by the UK Financial Conduct Authority.  To the extent this document has been issued in the EEA, it has been issued by MacKay Shields Europe Investment Management Limited, Hamilton House, 28 Fitzwilliam Place, Dublin 2 Ireland, which is authorised and regulated by the Central Bank of Ireland.


The information in these materials is not an offer to sell securities or a solicitation of an offer to buy securities in any jurisdiction of Canada.  In Canada, any offer or sale of securities or the provision of any advisory or investment fund manager services will be made only in accordance with applicable Canadian securities laws.  More specifically, any offer or sale of securities will be made in accordance with applicable exemptions to dealer and investment fund manager registration requirements, as well as under an exemption from the requirement to file a prospectus, and any advice given on securities will be made in reliance on applicable exemptions to adviser registration requirements.

“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company. 


Comparisons to a financial index are provided for illustrative purposes only. Comparisons to an index are subject to limitations because portfolio holdings, volatility and other portfolio characteristics may differ materially from the index. Unlike an index, individual portfolios are actively managed and may also include derivatives. There is no guarantee that any of the securities in an index are contained in any managed portfolio. The performance of an index may assume reinvestment of dividends and income, or follow other index-specific methodologies and criteria, but does not reflect the impact of fees, applicable taxes or trading costs which, unlike an index, may reduce the returns of a managed portfolio. Investors cannot invest in an index. Because of these differences, the performance of an index should not be relied upon as an accurate measure of comparison.

The following indices may be referred to in this document:


The Bloomberg U.S. Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by US and non-US industrial, utility and financial issuers. The US Corporate Index is a component of the US Credit and US Aggregate Indices, and provided the necessary inclusion rules are met, US Corporate Index securities also contribute to the multi-currency Global Aggregate Index.


Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.



また、当資料は、金融商品取引法、投資信託及び投資法人に関する法律または東京証券取引所が規定する上場に関する規則等に基づく開示書類または運用報告書ではありません。New York Life Investment Management Asia Limitedおよびその関係会社は、当資料に記載された情報について正確であることを表明または保証するものではありません。


当資料は、機密情報を含み、お客様のみに提供する目的で作成されています。New York Life Investment Management Asia Limitedによる事前の許可がない限り、当資料を配布、複製、転用することはできません。

New York Life Investment Management Asia Limited

金融商品取引業者 登録番号 関東財務局長(金商)第2964 号