T. Rowe: Inflation rebound next year poses pressure, not bullish on high-rated credit

T. Rowe Price is in a hedger position in some credit markets and expects rising inflation next year to put pressure on yields, so bank loans will be more stable than the volatility of bonds, the firm said.T. Rowe's international fixed-income head, Ken Orchard, said at a Tuesday market briefing that the market needs more time to fully digest "the path of inflation we're in." He is bullish on bank loans and securitized credit with lower duration risk and reduced global investment-grade bonds and dollar-denominated emerging market sovereign and corporate bonds."We don't expect credit spreads to widen significantly or any form of crisis," he said. "I do think credit will likely underperform government bonds at least through the first half of next year."T. Rowe favors loans and securitized creditOrchard said T. Rowe's multi-asset credit risk indicator switched to a "risk-off mode" in August after about 18 months in a "risk-on" mode."We don't expect the indicator to rebound to positive territory anytime soon," he said. "That's because we expect upward pressure on government bond yields to keep volatility high, which tends to be detrimental to credit."The spread on U.S. investment-grade corporate bonds, the extra yield investors get for holding riskier bonds relative to U.S. Treasuries, is hovering near its narrowest level in more than 25 years.The U.S. economy has proven resilient, and T. Rowe expects the global economy to perform well overall next year. But Orchard said strong economic growth doesn't necessarily mean strong credit performance.T. Rowe is among the firms expecting the Federal Reserve to cut interest rates by 25 basis points next month. T. Rowe is neutral on global high-yield corporate bonds, agency mortgage-backed securities and tax-exempt municipal bonds.