Key takeaways:
- US economic growth is proving resilient; this supports corporate fundamentals but equally keeps spreads tight, driving a keener focus on asset allocation and uncorrelated opportunities.
- Liquidity injections from authorities, together with government-sponsored enterprise purchases of mortgage-backed securities could put a near-term floor under certain markets and have a positive read-across to other securitized assets.
- Positive real yields, the potential for inflation to move lower as we lap tariff impacts, and the prospect of a dovish-leaning Fed chair, lead us to favor the front-end of the yield curve.
Resilient growth is supportive, but selectivity remains vital
US Q4 gross domestic product (GDP) growth in January is tracking well ahead of expectations from just a month ago. Looking ahead, we expect above-trend growth in 2026, supported by artificial intelligence (AI) driven capital spending (and productivity gains from AI adoption), deregulation, and the One Big Beautiful Bill (OBBB) tax package. The labor market appears to be in a “low hire, low fire” equilibrium, and recent data have been encouraging, though the US Federal Reserve (Fed) appears attentive to downside risks.
With inflation likely to fall – we soon start lapping tariff increases – the positive real yield on most fixed income asset classes should look increasingly attractive.
Spreads remain tight, but this environment should help keep them range bound for longer, increasing our confidence that we can “earn our carry” across many sectors. We intend to stay tactical in our asset allocation by taking advantage of potential sector dislocations.
We prefer securitized assets over corporates as they have lagged the broader move tighter and offer more room for further compression in addition to benefiting from comparatively higher carry. With government sponsored enterprises ordered to purchase US$200 billion of mortgage-backed securities this should prove supportive. In our quarterly “Perspectives” document we share our views 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 and can experience sudden and sharp price swings. 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.
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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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