Key takeaways:
- The U.S. Federal Reserve (Fed)’s hawkish pivot and a less certain global inflation path keep rate volatility elevated. In this environment, floating-rate assets, including loans and collateralized loan obligations (CLOs), and shorter-duration assets allow investors to earn carry with less exposure to rate volatility.
- At a broad level, we lean toward EUR-denominated assets over USD-denominated assets based on relative value. We continue to believe many securitized sectors offer attractive income per unit of risk and are supported by structural appetite.
- Robust economic growth, strong earnings and resilient consumers continue to support corporate credit fundamentals. Recent spread widening and lower bond prices have improved valuations, creating more opportunities within corporate credit.
Rates support floating rate assets, but corporate valuations are improving
The ongoing U.S.-Iran conflict led to elevated oil prices and with little sign of resolution in sight, markets grew concerned about second round effects on inflation. Against this backdrop, and with the global economy resilient, central banks pursued rate hikes, with the U.S. Federal Reserve raising rates in September. Markets priced in further hikes over the next 12 months, a remarkable shift from just a few months earlier.
This environment of elevated rate volatility reinforces our preference for selective securitized and floating rate assets, including loans and collateralized loan obligations. The combination of coupons resetting higher, lower duration risk and supportive industry flows enhances their appeal.
The picture, however, is evolving. Yields across fixed income assets are at or approaching the highs of the past decade, potentially reawakening interest among income-driven investors. At a spread level, valuations in corporate credit no longer look so stretched after recent spread widening. Corporate fundamentals remain strong, with earnings surprising positively and purchasing manager indices painting a robust outlook. Given the recent cheapening of corporate credit, together with a large element of the 2026 issuance already achieved, valuations and technicals are becoming more favorable. So while we continue to prefer securitized asset and loans, we are growing more constructive on corporates.
In our quarterly “Perspectives” document we share our views on the fixed income market and our quarterly asset allocation rankings. 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.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
