Finding opportunities in the global multi-sector fixed income landscape

Castleton: I’m Lara Castleton, and I’m back with John Lloyd, Portfolio Manager and Head of Multi-Sector Credit Strategy at Janus Henderson, to talk more about fixed income. And today in particular, we’re going to talk about the global landscape of the fixed income markets. So, John, thank you, again, for being here.

Lloyd: Thank you for having me.

Castleton: So, last time we talked about the ability of your strategy and your team to be dynamic across fixed income sectors. I want to narrow in on the global landscape today, because you also are dynamic in terms of your exposure to U.S. and ex-U.S. markets. So, let me just start by asking quickly, where is your general positioning globally and how has that changed recently?

Lloyd: Yes, it’s a good question, and I think it depends by sector. And just to give some examples, in the loan sector we’ve actually had a preference for euro loans. Why is that? We’ve seen companies come to market and they’ll issue tranches both in euros and dollars, and the euro tranche will come at, generally speaking, 25 basis points extra spread. So, same credit risk, but just because the euro market is trading a little bit cheaper, we have favored that market as well.

And, just as a reminder for people on our strategy, we don’t take any currency risks. That all gets hedged back as well. So, in the loan market we’ve preferred the euro loans. And it’s been interesting. We haven’t had a huge preference between euro and dollar in the corporate market. It’s wherever we’re finding the best ideas.

We have a global research team. Half sits in London, half sits in the U.S., in Denver, that research those ideas. But I will say with the recent changes in fiscal policy in the U.S. and the flow through to Europe fiscal policy from the ECB [European Central Bank] and some of the spending they’re going to be doing over there, the relative value has changed.

So, if we look at, for example, in the high yield market, we’ve actually been selling down some of our euro high yield exposure in favor of U.S. high yield exposure, because those spreads have tightened. They started to tighten and widened a lot less than U.S. high yield spreads over the last month.

Castleton: Yes, so that’s interesting, because in our client consultations on the equity front, we’ve actually started to get inbound calls about adding to Europe or ex-U.S. equities because of how much they have performed at the beginning of this year relative to U.S. But that does translate to a different picture when you’re thinking of the debt of Europe versus U.S. So, it sounds like you’ve had a decent amount of Europe, but that is starting to come into the factor of, going forward in your outlook, maybe trimming back some of that opportunity set.

Lloyd: Yes, and it’s just based on valuation. The European markets now are trading tighter than the U.S. markets. So, in that case, we favor rotating more into the U.S. markets, when that happened. The offset that people talk about is the growth outlook has changed. If you want to talk about the second derivative of growth, in the U.S. it looks like it’s getting worse, with all the tariff uncertainty and fiscal policies that are starting to flow through and may continue to flow through.

And Europe is the opposite right now. We’re going to have greater government spending, especially on defense, which should be good for growth. So, we’ve seen the opposite happen in the markets. Our rate market rallied, their market sold off, our spread market sold way off. Theirs actually tightened and then sold off a little bit, but not to the extent of the U.S. market. So, you’re seeing two uncorrelated markets at this point in what’s happening with rates and spreads.

Castleton: Yes, which, there have been many years in the past where we’ve had just globally synchronized central banks and economies. This does open up the opportunity set of why, as an investor, it might be nice to have somebody go global for you.

Lloyd: Yes. And I think that’s one of the advantages of a multi-sector income fund, is we can look at the global landscape and opportunity set to invest in. It doesn’t just have to be, do we like corporate spreads, agencies securitized? It can be what do we like within corporates? Do we like European corporates or do we like U.S. corporates? And then you throw up that emerging market that as well. It gives us a wide latitude of investment opportunities across these sectors and regions.

Castleton: Yes. And actually, as you mention that, that was going to be my final question on the global landscape, is that the emerging market debt space has come up a little bit more in our client conversations. It often is, I think, a little bit misunderstood from an end client expectation. But are you seeing opportunities in the emerging market debt space, and have you played in that area much in the past?

Lloyd: Yes, we’ve played, and we have a base weight in emerging market sovereigns. We have a really good team that provides us with opportunities to invest in there. I’ll say emerging markets has been pretty fairly valued. The part of emerging markets we’ve actually liked more has been the below investment grade. The investment grade side of emerging market sovereigns actually trades incredibly tight, and where a lot of the opportunity was in the below-investment grade portion of that market, and that’s where we focused the majority of our positioning.

And two, we use it as a diversifier because, like we just talked about, emerging markets doesn’t follow Europe and doesn’t follow the U.S. So, the other theme that our team is very focused on is, what countries are going to be winners and losers from tariffs as well. And so that’s going to be, I think, a big driver in emerging markets going forward.

Castleton: Well, that was going to be my final comment on emerging markets, especially even on the equity front. It’s one of the more complex spaces to invest in, and oftentimes clients will just passively allocate to get that differentiation. But now, layering on government policy and tariffs, the fact that the spread dynamic is so different, it is one that you want some expertise in that space, and we have a team that does that at Janus Henderson. That helps, correct?

Lloyd: No, for sure. They had deep research. They’re going to visit these countries, talking to their central banks and understanding the direction that they’re moving their fiscal policies and then how to invest around that, which is very helpful.

Castleton: Awesome, yes. Well, great. And I just want to wrap it up, I know we are talking about the global landscape, which can oftentimes come as this macro conversation. But it sounds like, again, at the end of the day, as a fund manager, is bottom-up fundamental research.

So, all of this comes down to the spread, relative value, opportunity, and boots on the ground, which is great, again, for our clients. Because nobody knows what’s going to happen over the coming weeks and months with everything going on. So, thank you, John, for wrapping that up with us here on the global landscape of fixed income.