Alternative credit

Learn why investing beyond core fixed income may help generate attractive income in today’s low yield environment.

Alternative credit

Learn why investing beyond core fixed income may help generate attractive income in today’s low yield environment.

Why alternative credit?

Many investors turn to their fixed income portfolio as a source of income and diversification. Alternative credit refers to asset types beyond traditional fixed income sources like U.S. Treasuries, high-quality corporate bonds and municipal bonds. 

Alternative credit may provide an attractive level of income and diversification as well as help manage the impact of changing interest rates.

Generate an attractive level of income

Investing beyond traditional fixed income in less-liquid areas of the market such as high yield bonds, senior secured loans and structured products may help provide differentiated sources of income.¹

Current yield as of December 31, 2022¹

Reduce the impact of changing interest rates

Adding assets that are less sensitive to changes in interest rates (low duration) may help reduce the impact of changing interest rates. 

While traditional fixed income investments have become more sensitive to changes in interest rates over the last 10 years, less-liquid areas of the credit market may help reduce a portfolio’s overall sensitivity to interest rates. 

Comparison of duration among asset classes

U.S. loans2
U.S. high
yield bonds2
Bloomberg U.S.
Aggregate Bond Index
December 31, 2012
0.25 years
3.92 years
5.07 years
December 31, 2022
0.25 years
4.04 years
6.40 years

Diversification

Finding low-correlated assets, or assets that do not move up and down together, is difficult today. However, less-liquid areas of the credit market have historically exhibited low correlation to traditional fixed income investments.

Correlation to the Bloomberg U.S. Aggregate Bond Index (2017-2022)²

Investor considerations

While core fixed income investments can be accessed through low-cost passive strategies, many less-liquid and more-complex areas of the credit market require a skilled manager. An active manager with the flexibility to invest across the credit markets may help identify and invest in attractive opportunities beyond the scope of traditional core fixed income investments. A broad, multisector approach may help generate income and diversify a traditional fixed income portfolio. Alternative credit may be debt that is not investment grade and may be subject to credit default risk. Investing in structured products is highly complex and speculative.

  • Differentiated sources of income refers to non-core fixed income investments (including, but not limited to, emerging market government debt, high yield bonds, emerging market corporate debt and structured products). The yield of these investments may be higher than those of core fixed income investments (including, but not limited to, U.S. Treasuries, investment grade corporate bonds and U.S. municipal bonds). Investing in non-core asset classes may carry increased risks as compared to core fixed income assets, including credit risk and liquidity risk.

  • Bloomberg, as of December 31, 2022. U.S. Treasuries are represented by the ICE BofAML U.S. Treasury Index. Municipal bonds are represented by the ICE BofAML U.S. Municipal Securities Index. U.S. corporate bonds are represented by the ICE BofAML U.S. Corporate Master Index. Mortgage-backed securities are represented by the ICE BofAML U.S. Fixed Rate CMBS Index. Emerging market government debt is represented by the J.P. Morgan EMBI Global Index. U.S. loans are represented by the S&P/LSTA Leveraged Loan Index. Emerging market corporate debt is represented by the J.P. Morgan CEMBI Broad Index. U.S. high yield bonds are represented by the ICE BofAML U.S. High Yield Index. Structured products are represented by the J.P. Morgan CLOIE Index and Clarity Solutions Group, LLC.

This information is educational in nature and does not constitute a financial promotion, investment advice or an inducement or incitement to participate in any product, offering or investment. FS Investments is not adopting, making a recommendation for or endorsing any investment strategy or particular security. All views, opinions and positions expressed herein are that of the author and do not necessarily reflect the views, opinions or positions of FS Investments. All opinions are subject to change without notice, and you should always obtain current information and perform due diligence before participating in any investment. FS Investments does not provide legal or tax advice and the information herein should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact any investment result. FS Investments cannot guarantee that the information herein is accurate, complete, or timely. FS Investments makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information.

Any projections, forecasts and estimates contained herein are based upon certain assumptions that the author considers reasonable. Projections are necessarily speculative in nature, and it can be expected that some or all of the assumptions underlying the projections will not materialize or will vary significantly from actual results. The inclusion of projections herein should not be regarded as a representation or guarantee regarding the reliability, accuracy or completeness of the information contained herein, and neither FS Investments nor the author are under any obligation to update or keep current such information.

All investing is subject to risk, including the possible loss of the money you invest.

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