Lara Castleton: Hello and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications that they have for investors. I’m your host for the day, Lara Castleton, and today we’re going to discuss fixed income.

Bonds are once again providing investors with attractive yields and are even regaining their traditional role as low-correlation diversifiers within a 60/40 portfolio. But many questions remain on the path forward, and credit concerns have been bubbling up, increasing investor anxiety.

To address these uncertainties and whether they’re an early warning sign of a broader economic downturn, I’m back with John Kerschner, Global Head of Securitized Products, and John Lloyd, Global Head of Multi-Sector Credit.

So, Johns … John Lloyd, let me go to you first. Can you just address the overall credit concerns that we’ve seen in the headlines? They’ve been a lot more present in the past few weeks.

Lloyd: Yes, we’ve had two credits, one on the corporate side, one on the securitized side, that’s been in the news, both been in the news quite a bit. First Brands on the corporate side and Tricolor on the ABS subprime side. I think a lot of our clients are asking, is this a canary in the coal mine? Is this an early warning sign for credit as a whole?

Our view at Janus Henderson is, it’s not the case. These are very idiosyncratic events where, at least in one of them, looks like both of them, fraud was the main cause of what took down those companies. You had major banks involved with them as well. It’s very hard to predict or even discover the fraud that was in those companies that end up going bankrupt.

If you look at the broader credit markets, they’re really healthy today. I use high yield as an example. The stress ratio in high yield is mid-single digits. If you look at the default rate, it’s been hovering near the lows for the last two years. Underwriting standards have been pretty strong.

The other market I think people are concerned about [is] private markets. We see a lot of the LBOs [leveraged buyouts] go through the leveraged loan market as well, and you’re still seeing that debt multiples put on them are at conservative levels, and the equity checks that the PE [private equity] firms are putting in are rather large. So I don’t see a lot of cause for concern from those two specific examples and from the broader markets as a whole.

Castleton: So, probably, it is good to remember, in general, there are defaults. They do happen within the credit market. It doesn’t mean it’s a broader economic drawdown. That is just maybe where the fundamental work can come into play to help avoid it, but this is not seemingly out of the norm.

Lloyd: Yes. It’s just a pitch for active management to underwrite the credits and make sure you know what’s going on in all of your credits. But I’ll reiterate again that the underwriting and the deals that we’re seeing, there’s not a lot of stress in the market today. I think it was purely coincidental that we got two big headlines at once with… the theme there is, there was some level of fraud in both of those companies.

Castleton: Got it. So, then, the other concerning thing, John Kerschner, if I go to you, it is centered around the consumer. You both do a lot of work in the strategies on the health of the consumer. What’s your update there? How is the consumer looking today?

Kerschner: Well, we never bought into the whole, the country’s going into a recession, that a lot of people did during Liberation Day or just thereafter. Obviously, Q1 growth was relatively low, Q2 growth rebounded to 3.8%, and now we’re looking at Q3 growth. Almost for sure, it’s going to be above 3%. So the growth is much better than a lot of people thought, particularly post-Liberation Day.

Now, a lot of people say, well, that’s because of tariffs and a lot of volatility and things like that. But when you drill down, look, consumer spending has held up. It was a little bit of a lull around Liberation Day. But now, when you look at credit card spending data, it’s come back up.

Then people say, well, yes, but the lower-end consumer is not doing that well. That is somewhat true. We don’t want to not emphasize the fact that inflation has hurt people. The stat that you hear over and over again, which is true and we agree with, is that 50% of consumer spending is coming from 10% of the population.

So, if you think about it, it makes intuitive sense. If you have a nice white-collar job, if you have a stock portfolio, if you own a home, your stocks have been doing very well, your home price is up, notwithstanding that your insurance and your property taxes are up. You’ve probably gotten some raises over the last couple of years as well. The lower-end consumer has been hurting somewhat, but I don’t think falling off the cliff.

Another thing that people will talk to us or come back at us with was, well, the job market is super soft. I think that is a little bit of a misnomer. Obviously, the Fed has been talking about that. It’s why they cut rates last month and will, almost for sure, cut rates this month again.

But you’ve got to remember, we’re going from an environment where we were getting millions of immigrants coming across the border and the U.S. economy had to create jobs to employ those. So, you go back a couple of years ago, we were basically creating over 200,000 jobs per month and that was keeping our unemployment rate relatively stable.

Estimates vary right now, but somewhere around 30,000 to 50,000 is all the job creation we need now. So call it a quarter or maybe even a fifth of what we needed a couple of years ago to keep that unemployment rate stable. So that’s a huge change, and I think people will get concerned if we’re only creating 30, 40, 50,000 jobs because they’re so used to that 200,000 number a month. But that’s still going to be very much a steady state.

So, in general, high-end consumer doing well, lower-end consumer not doing as well, but we’re still very constructive on the U.S. economy. One final point is, people forget we have this bill that was passed last summer, the One Big Beautiful Bill, and that means withholding will be less for people coming into the new year. They’ll get bigger tax refunds. There’s some other fiscal stimulus in that bill that hasn’t even taken place yet. So we think 2026 is going to be a pretty good year for the economy.

Castleton: Great. So, I guess maybe we should spend the rest of this time focusing, then, on the sector that is most tied to that consumer, given the backdrop you just painted. Thank you for that.

So, John Lloyd, asset-backed securities or ABS: They are tied to the consumer directly, and we have a lot of expertise within that space. Can you just define what those are, examples, and where can investors get access in just the broad fixed-income benchmarks?

Lloyd: It’s actually quite difficult to get exposure in the broad fixed-income benchmarks, in the Agg [Bloomberg U.S. Aggregate Bond Index], which is one of the larger benchmarks within fixed-income. It’s got de minimis exposure. I would highlight, it’s an $800 billion sector. An asset-backed security is any security that has an asset with cash flows that you structurally have a right to those cash flows over time to pay down the debt.

The two largest sectors within ABS are credit cards and auto, but there are a lot of other disparate sectors involved in there. There’s data centers, solar, student loans, whole business, cell towers, fiber. It’s a very broad industry. The other thing I tell investors is, you want a deep analyst bench to be able to understand all those various sectors.

The last point, and I think investors should understand that, is that underwriting standards since the GFC [Global Financial Crisis], since 2010, have gotten better for ABS. So those structures are more structurally sound today. If you look at the relative value versus corporate credit, they’re trading cheaper today as well. So it’s an asset class we really like.

Castleton: Very large market then. Again, to be able to convey views on the broader consumer, where you have expertise, it seems like one of those ways where you can really look at what sectors within tranches, as well as credit quality, to provide a view for our clients at the end of the day.

Lloyd: Correct. That’s a good point, too. Almost all the ABS structures come with a triple-A tranche all the way down to maybe a triple-B, double-B tranche as well. So you can play various levels of credit risk and spread within an individual ABS structure as well.

Castleton: So, lots of flexibility there. If I go to you, John Kerschner, you already provided some high-level views on the Fed and the macroeconomic background, backdrop, expecting maybe rates to come down a little bit more for the rest of this year. Can you elaborate on the outlook for rate policy inflation? And then, how does that tie to ABS as a whole? I’m sure not uniformly, but within certain areas.

Kerschner: Right. So the Fed has been very clear that they’re much more concerned about the job market than they are about inflation. A cynic might say, well, we have this huge amount of debt now, and no party in Congress has any indication whatsoever that they’re going to deal with it. So the way that you do deal with it is just, you let inflation run a little hot and you deflate away some of that debt. So we kind of expect that to happen because that’s what the Fed has been telling us.

The Fed has also said that they’re willing to cut rates in order to offset the weakness in this labor market. Obviously, we have a new Fed chair coming in in 2026, and if you want to be a viable candidate, you have to kowtow to what the White House wants right now, which is lower rates. So all the main candidates out there have basically toed that line.

So, how many cuts? Hard to say. Like I said, we’ve had one last month. We’re going to have another one, almost for sure. Market’s pricing in another one for December, probably a couple more in 2026. So it means the fed funds rate probably coming down to about 3%.

We do think the Fed is going to cut. Now, we don’t really know what’s going to happen with the yield curve, but if inflation is running a little hot, it probably means the long end doesn’t come down as much as the short end, and that means the yield curve will steepen.

One other nice thing about ABS is that almost all ABS transactions are issued five years and in. Unlike corporate credit, which, there’s a lot of seven-year, 10-year, 30-year debt out there, ABS, if you’re buying it, you’re almost by definition buying a two-year or three-year or a four-year weighted-average life security. So we think that makes ABS even more attractive.

So, bottom line, look, we think the Fed’s going to be accommodative. We think GDP growth is actually going to be quite strong. Like I said, for third quarter, north of 3%. Probably comes down a little bit in the fourth quarter, but, then again, with this stimulus coming in 2026, probably above 2% in 2026. So, if you have a market where growth is at least average to a little bit strong and the Fed’s cutting rates, that should be good for risk assets, that should bring down volatility, and that should steepen the yield curve.

Castleton: So, great to set up the background, five years and under with the duration profile. That’s very diversifying for a lot of just traditional core exposures within portfolios that advisors or financial professionals…

Kerschner: Yes, because the core, the Agg, is about six years of duration right now.

Castleton: Okay. So, diversifier from there. Given the economic backdrop and the outlook that we have, then, I’m assuming not all subsectors within ABS we love equally. So, can you highlight maybe one or two areas that are really in focus and you guys are excited about the opportunity in?

Lloyd: Yes. I’ll say, thematically across ABS, going to what John mentioned earlier with the higher-end consumer doing better and the subprime consumer struggling a little bit more.

Then, a subsector I would highlight, and it’s really related to the AI theme we’re seeing and all the spending in AI, is data centers. You’re now seeing corporate debt being raised, CMBS debt being raised, and ABS debt being raised for data centers. So it’s been a growing market as well.

And you’re getting really healthy spreads. If we compare those three markets, you’re getting better spreads for the level of risk in ABS than you are in the corporate market. So that’s a thematic sector we like in the ABS market.

Kerschner: Let me just add on to that. Those are all great points, but this is why you want active management, right? Like you said, there’s so many different subsectors underneath the ABS umbrella and different issuers, whether prime or subprime, but even within prime or within subprime, there are different issuers there. So you can’t just go out and just buy every deal out there. You really have to dig in and do the work and do your scenario analysis.

Then, even then, you have to understand how far down the capital stack you’re comfortable. Because there are some deals we’ll go to below investment grade. There are some deals we’ll only go to single-A based on our scenario analysis and our stresses. So, like I said, it’s really an advertisement for active management, and that’s why we believe in it so much.

Castleton: Well, in that theme in particular, AI is causing a lot of headlines as well. So you also need that expertise and view that we have here at Janus Henderson. I just recorded a podcast with Denny Fish, who lives in Silicon Valley and has a view on AI and how maybe we’re not necessarily in the bubble yet. At least that’s the thought. So there’s still all of this worry about where AI is. Clearly, we’re seeing a lot of that within the data center space that’s still looking very attractive. Demand is very much still outstripping supply. So that collaboration’s been very helpful.

Kerschner: Yes, no question. I think we’re in the early innings of this whole AI situation. So I don’t believe we’re in a bubble yet, at least not in the credit markets, for sure.

Lloyd: Yes. Interesting that you brought up Denny, but our analysts… When we’re doing the data center stuff, we have our corporate analysts working with our ABS and CMBS analysts and they’re also working with our equity team. So it’s collaborative across the asset classes within fixed, and across equity and the fixed income markets as well, and just shows our deep research capabilities.

Castleton: Anything we’re staying away from within the ABS space right now or more cautious on?

Kerschner: It’s more the subprime consumer. There’s a thing, subprime credit cards. They have nice spread, but it’s illiquid. They’re not really issuers [that] have been around for a long time.

Lloyd: Yes, and in the subprime market we’re seeing delinquency rates at peak levels over the last 10 years as well, x-ing out maybe COVID. It’s another reason, if you look at the underlying fundamentals, they’re just not that strong.

Castleton: Good to know. So, thank you for that background on the ABS sector. But in general, you do manage multisector strategies that go across credit, securitized, even some sovereign potentially, and globally, with flexibility on duration. So maybe we’ll just end here. Over the next couple of months or year, what’s top of mind within that multisector strategy? What will you be looking for?

Lloyd: Yes. I think the theme… and we had a little wobble with the trade announcement last week within credit but, generally speaking, spreads are really tight on the corporate side. They’re more fair-valued on the securitized side. In that type of environment, you really want to focus on two things: You want to focus on maximizing your yield per unit of volatility and drawdown.

The other opportunity that John highlighted is just staying on the front end of the curve for right now. One, we think that reduces volatility. And, for all the reasons he highlighted, we think the front end will do better than the long end on the duration side.

Kerschner: Yes, and I’d just say that, look, if you’re taking risk, you want to be paid for it. It’s not one of those markets where you can just go buy anything, like maybe right after COVID or something like that, and you’ll look like a genius just because you bought things. I don’t think we’re in that type of market. But people need to realize that rates are still relatively high, like you mentioned.

So, look, you don’t have to do a lot of crazy things. You don’t have to take a huge amount of risk. Just active management, managing the portfolio very carefully, making sure you’re getting paid when you are taking risk, and you’re still getting a pretty nice return out there.

Castleton: Great. Well, thank you both for being here, help demystify some of the headlines that everybody is reading, and lay out a productive case for ABS and fixed-income markets and active management going forward.

Thank you all for listening. We hope you enjoyed the conversation. For more insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts or check out our website at janushenderson.com. I’m Lara Castleton. Thank you. See you next time.