Goldman Sachs recommends short-dated crossover bonds

Goldman Sachs credit strategists recommend buying crossover bonds in their most recent research piece.

In order to maximise carry and minimise exposure to weak growth and default risks, strategists argue that double-B rated bonds offer the highest net return after defaults.

Triple-B rated notes also offer a good return when they are adjusted for their lower volatility. With many institutional investors staying away from triple-Bs, they maintain a good balance between spreads and rates, says strategists. The negative correlation between rate and spread returns, moreover, helps stabilise triple-B bonds that are marked to market.

By proxy, Goldman also recommends buying a negative basis basket on crossover bonds, arguing that the credit default swap-cash basis continues to offer investors a substantial liquidity premium. The basis on high-beta investment grade names will continue to tighten, given a better-capitalised financial system in the US, limited risk of increase in deleveraging pressures, and a solid appetite for investment grade bonds.