CEO Sessions: What are clients focused on within fixed income?
In these short videos, Ali Dibadj, CEO, speaks with Janus Henderson’s experts about how they are investing together with clients for a brighter future. At our recent Madrid Investment Summit, Ali spoke with John Lloyd and John Kerschner about the conversations they’re currently having with clients on fixed income.
3 minute watch
Key takeaways:
- Client conversations have been focused on rate volatility amid shifts in central bank policy, and how to maximise yield opportunities without taking undue levels of risk.
- Fixed income currently provides attractive opportunities, particularly within securitized assets, with relatively high starting yields providing a positive indicator for future returns.
- Deglobalization makes taking an active approach to fixed income investing more important than ever with selectivity needed at a security and company level across regions.
Important information
Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.
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.
Real yields: The yield a fixed income security pays above expected inflation. When real yields are positive, the security is yielding more than inflation, when negative, it is less than inflation.
Spread compression: Spread is the difference in yield between a corporate fixed income security and a government bond of the same maturity. The spread is essentially the compensation that investors are demanding for taking on credit risk. When spreads compress (i.e. go down or tighten) this is usually indicative of a positive corporate environment, whereas a widening of spreads generally indicates deteriorating creditworthiness of corporate borrowers.
Total return: The combined return from income and capital gain/loss.
Yield: The level of income on a security over a set period, typically expressed as a percentage rate.
Volatility: The rate and extent at which the price of a portfolio, security, or index, moves up and down.
Ali Dibadj: Hey everyone, it’s Ali Dibadj at the Madrid Investor Summit. We’re really excited to be here. Lots of energy in the crowd. I’m really happy to be here with John Kerschner, Head of Global Securitized, and John Lloyd, our head of multi-sector credit. Guys, you have been talking to investors for quite some time, including today. What are people asking you about?
John Kerschner: Why don’t you start John?
John Lloyd: Yeah, I think, two of the bigger issues in fixed income right now are just overall rate volatility. You know, you have a Fed that has pivoted pretty hard in the last couple months from focusing more on the inflation target to the unemployment weakness we’ve been seeing.
And then the other thing investors are focused on are valuations are pretty tight across most fixed income products. So how do we provide a solution that minimizes that volatility and still clips good yield without downside risk.
Kerschner: Yeah. And I would just add to that, that what we kind of come back with is yes corporate credit – very tight. Yields still look okay overall – all in yields – but for securitized not nearly as tight as corporate credit.
So, there’s still a lot of relative value within securitized, particularly if you’re doing security selection. And that’s where the active management comes in.
Dibadj: And so just to build on that a little bit, what do you think is missing from investors’ minds. What are the things not on the radar screen?
Kerschner: Well, I think people forget. And we talk about this a lot, the best predictor of future returns in fixed income are your starting yields. And they’re still relatively high. So, people worry sometimes like, well, we’re not going to get a good total return. But if indeed the Fed continues to cut rates and GDP growth in the US at least still looks pretty strong, then that’s going to be very good for risk assets. So, you might have some rates coming down and still some spread compression. That’s going to be good for fixed income.
Lloyd: Yeah. The other thing I would add to that is we still have positive real yields. So we went through a, you know, a few painful years where fixed income returns were, you know, were not that appealing and actually hurt a lot of portfolios. And now we’re at a starting point where we have positive, real yields. You put a spread on top of that, and fixed income is actually interesting for investors again.
Dibadj: Look, we’ve talked about a lot of changes in the environment right now, whether it be yields or rates or what have you. One of the conference topics, this time is around deglobalization. How should we think about that as we think about fixed income?
Lloyd: Yeah, this is a huge pick for, for active management, in my opinion. We’re a global firm with a global research team across the globe and we’re able to not only invest regionally, but in the best companies and securities regionally that can manage the tariff and the deglobalization trends and the geopolitical trends that we’re seeing.
Kerschner: Yeah, and not to pound the table on securitization too much, but we are fortunate within securitization. It’s a global market. But it’s usually local type firms lending to local investors, right. So, there are few areas like shipping containers. They’re impacted by the globalization. But the tariffs, at least on a primary concern, really haven’t affected a lot of people. Obviously, when it comes to inflation, that’s got to be factored in, but not nearly as much as what we’ve seen in corporate credit.
Dibadj: Right. Thank you very much, guys. You heard it here first. So fixed income is relevant again. Certainly active management and opportunities around the world, but certainly in securitized as well. Thanks, everybody.
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.
Marketing Communication.
3 minute watch
Key takeaways:
- Client conversations have been focused on rate volatility amid shifts in central bank policy, and how to maximise yield opportunities without taking undue levels of risk.
- Fixed income currently provides attractive opportunities, particularly within securitized assets, with relatively high starting yields providing a positive indicator for future returns.
- Deglobalization makes taking an active approach to fixed income investing more important than ever with selectivity needed at a security and company level across regions.