T.Rowe: Inflation rebound next year is a cause for concern, not optimistic about high-grade credit.

T. Rowe Price is in a risk-averse position in certain credit markets, expecting inflation to rise next year and put pressure on yields, so the stability of bank loans will be preferred over the volatility of bonds. Ken Orchard, head of T. Rowe's international fixed income division, said in a market briefing on Tuesday that the market needs more time to fully digest "the inflationary path we are on." He is bullish on bank loans and structured credit with low term risk, and is reducing exposure to global investment-grade bonds and US dollar-denominated emerging market sovereign and corporate bonds. He stated, "We do not expect credit spreads to widen significantly, nor do we anticipate any form of crisis. I do believe that at least in the first half of next year, credit performance may lag government bonds." T. Rowe favors loans and structured credit. Orchard stated that T. Rowe's multi-asset credit risk indicator switched to a "risk-off mode" in August after maintaining a "chasing risk" stance for about 18 months. He said, "We do not expect this indicator to return to positive values in the near term. This is because we expect upward pressure on government bond yields to keep market volatility elevated. This volatility is often not favorable for credit." The spread of US investment-grade corporate bonds, which is the additional yield investors receive for holding riskier bonds relative to US treasuries, is currently hovering around the narrowest levels in over 25 years. The US economy has proven to be resilient, and T. Rowe expects global economic performance to be overall strong next year. However, Orchard noted that strong economic growth does not necessarily mean strong credit performance. T. Rowe is one of the institutions forecasting another 25 basis point rate cut by the Federal Reserve next month. T. Rowe maintains a neutral position on global high-yield corporate bonds, agency mortgage-backed securities, and taxable municipal bonds.