Multi-Sector Credit Asset Allocation Perspectives: ‘Fed put’ reaffirms carry is key
A supportive Fed emphasises how ‘carry is still king’ when investing across fixed income. As we navigate emerging bifurcation and increasing opportunities, we look at the sectors and themes like AI that are driving our asset allocation and security selection.
4 minute read
Key takeaways:
- Q3 growth estimates are picking up and gross domestic product (GDP) is likely to accelerate in 2026; not all sectors will benefit equally, and asset allocation will be essential.
- Bifurcation is increasing – loan markets show a widening gap between stronger businesses with manageable leverage and weaker businesses with elevated leverage.
- The Fed is easing and has signalled a willingness to accelerate rate cuts if the labor market deteriorates further; this increases our confidence in the carry environment.
Amid solid growth and a more accommodative Fed, carry remains key
The US growth outlook is improving with third-quarter GDP estimates moving up toward 3%, bolstered by the capex budgets of hyperscalers. We discuss the AI infrastructure theme further within this report, including examples of compelling opportunities it is creating across fixed income. Bifurcation is increasing; sectors and issuers tied to the AI ecosystem are ascribed a premium whereas cyclical industries tied to more challenged end markets are being penalized.
Immigration policy has reduced labor supply; while headline jobs data continues to soften, the payroll numbers required to hold a steady unemployment rate are now materially lower. Looking to the year ahead, easing monetary policy, tax cuts, a lapping of tariff impacts, and regulatory relief all paint a constructive picture for growth. We expect inflation to pick up, which could complicate the Fed’s path and this remains one of the largest risks.
Spreads in most fixed income assets remain relatively tight. With a solid economic backdrop and the ‘Fed put’ now in play, we are positioned to capture carry through assets that still offer value. We share our perspectives on the fixed income market and our quarterly asset allocation ranking. We highlight a timely chart to watch, explore relative value opportunities, and provide insight on our latest asset allocation scores by fixed income sub-sector.
IMPORTANT INFORMATION
Fixed income securities are subject to interest rate, inflation, credit and default risk. As interest rates rise, bond prices usually fall, and vice versa. High-yield bonds, or “junk” bonds, involve a greater risk of default and price volatility. Foreign securities, including sovereign debt, are subject to currency fluctuations, political and economic uncertainty and increased volatility and lower liquidity, all of which are magnified in emerging markets.
Securitized products, such as mortgage- and asset-backed securities, are more sensitive to interest rate changes, have extension and prepayment risk, and are subject to more credit, valuation and liquidity risk than other fixed-income securities.
Collateralized Loan Obligations (CLOs) are debt securities issued in different tranches, with varying degrees of risk, and backed by an underlying portfolio consisting primarily of below investment grade corporate loans. The return of principal is not guaranteed, and prices may decline if payments are not made timely or credit strength weakens. CLOs are subject to liquidity risk, interest rate risk, credit risk, call risk and the risk of default of the underlying assets.
Bank loans often involve borrowers with low credit ratings whose financial conditions are troubled or uncertain, including companies that are highly leveraged or in bankruptcy proceedings.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
Related insights
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
Please read the following important information regarding funds related to this article.
- An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
- When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
- The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
- Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
- Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
4 minute read
Key takeaways:
- Q3 growth estimates are picking up and gross domestic product (GDP) is likely to accelerate in 2026; not all sectors will benefit equally, and asset allocation will be essential.
- Bifurcation is increasing – loan markets show a widening gap between stronger businesses with manageable leverage and weaker businesses with elevated leverage.
- The Fed is easing and has signalled a willingness to accelerate rate cuts if the labor market deteriorates further; this increases our confidence in the carry environment.