
KEY INSIGHTS
• Fixed income investors will need to be creative in 2021, as low yields and tighter credit spreads could make attractive returns harder to find.
• A strengthening economic recovery in 2021 could favor fixed income sectors that potentially can do well in a rising interest rate environment.
• Yields in the credit sectors still appear relatively attractive. However, ample financing could allow weak firms to survive, lowering credit quality.
Credit spreads still wide in some areas
Strengthening economic recovery in 2021 would carry risks for bond investors, warns Mark Vaselkiv, chief investment officer, Fixed Income. He says investors will need to be creative in seeking out fixed income sectors - such as floating rate bank loans and emerging market corporates - that potentially can do well in a rising interest rate environment.
Massive infusions of central bank liquidity successfully stabilized global credit markets in 2020, even as a pandemic‑driven flight to quality pushed already‑low sovereign yields even lower. These dual trends produced strongly positive returns across most fixed income sectors.
We think it will take significant creativity to find attractive opportunities in such a low interest rate environment.
Moving into 2021, however, investors face a more challenging environment, Vaselkiv says. With short‑term yields at ultralow or negative levels and the US yield curve steepening as economic growth and inflation expectations revive (Figure 1), interest rate risk could become a critical issue, he cautions.
Credit markets also no longer appear as attractive as they did after central banks launched their rescue operations in 2020, Vaselkiv says. With investment‑grade (IG) and high yield credit spreads back closer to their historical norms - despite the lingering effects of the pandemic - active sector and security selection are likely to play more critical roles in seeking yield and managing risk in 2021.
Yield curves are lower but steeper than at the beginning of 2020
(Fig. 1) Sovereign yield curves (left) and yield curve slopes (right)

As of November 30, 2020.
Past performance is not a reliable indicator of future performance.
Source: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved.
“We think it will take significant creativity to find attractive opportunities in such a low interest rate environment,” Vaselkiv says.
Creativity, Vaselkiv notes, could mean moving further out the credit risk spectrum, potentially increasing allocations to floating rate loans and other low‑duration assets, and seeking opportunities in ex‑US debt markets. Skilled credit analysis could be crucial to success.
An expanded credit universe
For credit investors, the flood of new U.S. dollar‑denominated corporate issuance seen in 2020 - an estimated USD2tn in investment‑grade debt and more than USD500bn in high yield debt - offers both potential opportunities and additional risks, Vaselkiv says.1
On one hand, yields in the credit universe still appear attractive on a relative basis, in Vaselkiv’s view. While many companies have increased their debt loads, he says, in many cases liquidity ratios actually have improved. This should help businesses in cyclical sectors such as energy, airlines, and lodging fend off insolvency until economic conditions normalize.
However, ample financing also could allow structurally weak firms to survive even though their longer‑term prospects for profitability appear dim. “We may end up with a universe of companies that limp along for the next five to seven years just because the credit markets keep them afloat,” Vaselkiv says.
In an environment where short‑term rates are at or close to zero, but prospects for a post‑pandemic recovery appear to be brightening, duration - a key measure of interest rate risk - could become a top issue for many fixed income investors in 2021, Vaselkiv says.
Extended durations for high‑quality sovereigns and investment‑grade corporates (Figure 2) mean that even modest upticks in interest rates and inflation could produce significant capital losses on those assets, he warns.
Potential opportunities in floating rate and emerging market debt
Floating rate bank loans - syndicated loans to companies that are then sold to mutual funds and other institutional investors - offer potentially attractive advantages in this environment, according to David Giroux, CIO, Equity and Multi-Asset. Bank loans sit higher in the borrower’s capital structure than high yield bonds, he notes. Historically, he says, this has resulted in higher recoveries in default situations.
Interest rate risk potentially makes shorter‑duration assets more attractive
(Fig. 2) Yield versus interest rate risk (duration)

As of November 30, 2020.
Yields and duration are subject to change.
Sources: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved; J.P. Morgan Chase & Co.; and Bloomberg Barclays (see Additional Disclosures). Index performance is for illustrative purposes only and is not indicative of any specific investment. Investors cannot invest directly in an index. Floating Rate Bank Loans = J.P. Morgan Leveraged Loan Index; Global High Yield Bonds = Bloomberg Barclays Global High Yield Index; Emerging Market Bonds (Local Currency) = J.P. Morgan GBI‑EM Global Diversified Composite Index; Emerging Market Bonds (USD) = J.P. Morgan EMBI Global Index; Global Ex‑U.S. IG Corporate Bonds = Bloomberg Barclays Global Corporate IG Index; U.S. IG Corporate Bonds = Bloomberg Barclays U.S. Investment Grade Corporate (300MM) Index; Global Aggregate Bonds = Bloomberg Barclays Global Aggregate Index; 10‑Year U.S. Treasury = U.S. Benchmark Bond–10 Yr; 10‑Year German Bund = Germany Benchmark Bond–10 Yr; 10‑Year Japanese Gov’t. Bond = Japan Benchmark Bond–10 Yr.
The floating rate feature of bank loans also gives them an extremely low duration profile - comparable to US Treasury bills and other short‑term instruments - but with substantially higher yields, Giroux says. “Historically, floating rate loans have been the one fixed income sector that has tended to appreciate when interest rates are rising,” he argues.
Fixed income assets outside the US - especially emerging markets corporate debt denominated in local currencies - also could hold opportunities for global bond investors in 2021, Vaselkiv says. A weaker US dollar, he adds, could enhance that appeal by potentially boosting returns on nondollar assets for dollar‑based investors and potentially improving the creditworthiness of U.S. dollar bond issuers.
Historically, floating rate loans have been the one fixed income sector that has tended to appreciate when interest rates are rising.
Key factors such as relative interest rates, relative growth rates, and relative monetary liquidity suggest that the trend toward US dollar depreciation could continue in 2021, Vaselkiv argues. “Historically, U.S. dollar currency cycles have tended to last for significant amounts of time,” he says. “This potentially bodes well for international allocations - not just in fixed income, but also for equity names that generate a large portion of their earnings outside the US”
Conclusions
For fixed income investors, 2021 could be challenging, as the falling yields and tightening credit spreads that boosted broad market returns in 2020 aren’t likely to play that role again. Rather, extended durations and the potential for a modest revival in inflation could make managing interest rate risk a portfolio priority, boosting the appeal of floating rate assets.
Mark Vaselkiv is chief investment officer, fixed income, at T. Rowe Price
David Giroux is chief investment officer, equity and multi-asset, at T. Rowe Price
1 See: John Lonski, “Record-High Bond Issuance Aids Nascent Upturn,” Weekly Market Outlook, Moody’s Analytics, October 1, 2020.
Additional Disclosures
Information has been obtained from sources believed to be reliable but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2021, J.P. Morgan Chase & Co. All rights reserved.
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Important Information
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
Australia — Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. For Wholesale Clients only.
Brunei — This material can only be delivered to certain specific institutional investors for informational purpose upon request only. The strategy and/or any products associated with the strategy has not been authorised for distribution in Brunei. No distribution of this material to any member of the public in Brunei is permitted.
Canada — Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
China — This material is provided to specific qualified domestic institutional investor or sovereign wealth fund on a one-on-one basis. No invitation to offer, or offer for, or sale of, the shares will be made in the People’s Republic of China (“PRC”) (which, for such purpose, does not include the Hong Kong or Macau Special Administrative Regions or Taiwan) or by any means that would be deemed public under the laws of the PRC. The information relating to the strategy contained in this material has not been submitted to or approved by the China Securities Regulatory Commission or any other relevant governmental authority in the PRC. The strategy and/or any product associated with the strategy may only be offered or sold to investors in the PRC that are expressly authorized under the laws and regulations of the PRC to buy and sell securities denominated in a currency other than the Renminbi (or RMB), which is the official currency of the PRC. Potential investors who are resident in the PRC are responsible for obtaining the required approvals from all relevant government authorities in the PRC, including, but not limited to, the State Administration of Foreign Exchange, before purchasing the shares. This document further does not constitute any securities or investment advice to citizens of the PRC, or nationals with permanent residence in the PRC, or to any corporation, partnership, or other entity incorporated or established in the PRC.
DIFC — Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.
EEA ex-UK — Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Hong Kong — Issued by T. Rowe Price Hong Kong Limited, 6/F, Chater House, 8 Connaught Road Central, Hong Kong. T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission. For Professional Investors only.
Indonesia — This material is intended to be used only by the designated recipient to whom T. Rowe Price delivered; it is for institutional use only. Under no circumstances should the material, in whole or in part, be copied, redistributed or shared, in any medium, without prior written consent from T. Rowe Price. No distribution of this material to members of the public in any jurisdiction is permitted.
Korea — This material is intended only to Qualified Professional Investors upon specific and unsolicited request and may not be reproduced in whole or in part nor can they be transmitted to any other person in the Republic of Korea.
Malaysia — This material can only be delivered to specific institutional investor upon specific and unsolicited request. The strategy and/or any products associated with the strategy has not been authorised for distribution in Malaysia. This material is solely for institutional use and for informational purposes only. This material does not provide investment advice or an offering to make, or an inducement or attempted inducement of any person to enter into or to offer to enter into, an agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities. Nothing in this material shall be considered a making available of, solicitation to buy, an offering for subscription or purchase or an invitation to subscribe for or purchase any securities, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of Malaysia.
New Zealand — Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.
Philippines — THE STRATEGY AND/ OR ANY SECURITIES ASSOCIATED WITH THE STRATEGY BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE OF THE STRATEGY AND/ OR ANY SECURITIES IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE, UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.
Singapore — Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #10-02 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore. For Institutional and Accredited Investors only.
South Africa — T. Rowe Price International Ltd (“TRPIL”) is an authorised financial services provider under the Financial Advisory and Intermediary Services Act, 2002 (FSP Licence Number 31935), authorised to provide “intermediary services” to South African investors.
Switzerland — Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
Taiwan — This does not provide investment advice or recommendations. Nothing in this material shall be considered a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person in the Republic of China.
Thailand — This material has not been and will not be filed with or approved by the Securities Exchange Commission of Thailand or any other regulatory authority in Thailand. The material is provided solely to “institutional investors” as defined under relevant Thai laws and regulations. No distribution of this material to any member of the public in Thailand is permitted. Nothing in this material shall be considered a provision of service, or a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person where such provision, offer, solicitation, purchase or sale would be unlawful under relevant Thai laws and regulations.
UK — This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
USA — Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2021 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.