What to expect from credit markets in 2024

Thomas Mucha, Geopolitical Strategist
Campe Goodman, CFA, Fixed Income Portfolio Manager
2023-12-21T12:00:00-05:00  | S2:E20  | 27:30

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Veteran Fixed Income Portfolio Manager Campe Goodman offers his views on what investors can expect from credit markets in 2024. 

1:50 Professional background

2:50 Research and investment approach

4:15 Genesis of credit-sector rotation

7:45 Collaborating with other fixed income investors

11:25 Historical analogues to today's markets

14:30 Current credit market opportunities and risks

18:20 Effects of climate change and geopolitics

22:30 Biggest career lessons


CAMPE GOODMAN: One of the things that I think is really important is that geopolitics and geopolitical risk actually creates opportunities, and we’ve seen this after the outbreak of any sort of volatility in markets. During these times, there’s a lot of emotion and things that we are often feeling too. But we also try to just look at it very objectively, through our investment lens and try to think about where there are opportunities.

THOMAS MUCHA:  Relatively speaking, 2023 was something of a wild ride for the bond market. While investors held their breath after the US Treasury yield curve inverted near the end of ’22, recession never materialized, and as the Fed tried to tamp down inflation, it found itself doing so amid strong economic growth, enthusiastic consumer spending, and persistent low unemployment -- a challenging combination. In 2023, sudden, steep interest rate increases startled investors and exacerbated market volatility, and on top of all that, the macro, and of course, geopolitical picture continues to create a backdrop of uncertainty. So, what can we expect from fixed-income markets in 2024? Here to help us sort things out is Campe Goodman, a veteran portfolio manager focused on credit-sector rotation. Campe, so good to have you here, and welcome to WellSaid.

CAMPE GOODMAN:Thanks, Thomas. It’s great to be with you today.

THOMAS MUCHA:  So let’s start, Campe, with a little bit about your background. So what led you to our fine industry? And then what hooked you on credit markets in particular?

CAMPE GOODMAN:My road to investment management came through, first doing math in college, and then doing economics in grad school. And I got interested in economics because I felt like it was a mathematical way of helping to explain, how the world works and how people behave. That was what really got me interested. From there, I got into investment management because it seemed like a good way to put economics to use, and specifically, really, I wanted to get into fixed-income, not into equities, because I was interested in macro and thinking about some of the big questions, I guess. It was a bit of a cousin of your interest in geopolitics, to be interested in think about some of the big questions and how they applied to markets.

THOMAS MUCHA:  Yeah, I have a similar background in macroeconomics too. I find it to be a really useful framework in understanding human behavior. And I can apply that even to geopolitics as well. So it’s interesting to hear you say that. So let’s get into some of the specifics on what you’re doing here, Campe. Now, most credit investors, begin as bond analysts or grow up researching a single sector, like high yield. Your formative training in credit investing was a little different. So how does your experience influence how you identify credit opportunities?

CAMPE GOODMAN:  Because of my macro background, I really was put to work first thinking about interest rates and thinking about asset allocation, what we call within fixed-income sector rotation, essentially, looking at the different sectors across the fixed-income markets. And so early in my career, I was really thinking top down first and then working bottom up, and that is unusual for a fixed-income investor, where they often begin as a credit analyst. I think one of the things that was really helpful to me was that I actually did start at Wellington, and so I got to talk to a lot of different investors and learn a lot of different sectors without having to be biased by growing up in one of those sectors. Really, I’ve been told that, there are a couple of things that I seem to be good at, and one is convening different groups of investors and bringing them together and, getting them to talk to each other. And the other is that I’m told that I ask, different or surprising questions. I think that may sometimes just be a way of saying weird questions, but that seems to be helpful sometimes.

THOMAS MUCHA:   You’ve been here for a long time, Campe, and you were early to see the potential in allocating dynamically across different credit sectors in a single approach. Maybe that’s an outgrowth of the philosophy and the process that you just outlined. But what were you seeing at the time? And how has that investing style changed, let’s say, over the past decade?

CAMPE GOODMAN:I guess my interest in looking across different sectors and sector rotation, goes at least back to 2008 when, we had a client that came to us and asked us for essentially a custom solution, and I was asked to put this together. And, I really tried to think, “How do I think about relative value across all these different sectors of the market, where some of them are high quality and some of them are, low quality, some of them are riskier than others, and how do you compare these different sectors?” And I started to think about this from my macro perspective, and I had the good fortune of working with another investor here, Rob Burn, who has a very quantitative bent. And we started to think about how could we incorporate both a fundamental lens and a quantitative lens and what we hit on, really, was that first of all, we needed to think not just about the potential returns from different sectors, but about the risk that we were getting. So we really wanted, number one, was risk-adjusted returns. And then the second thing that was really, important to us was to take out the rates component. So we didn’t want to just be thinking about some sectors are floating rate, others are fixed-rate, some are long duration, others are short duration, others they’re very affected by interest rates. But we wanted to think about the credit component. In other words, what were you going to get, in excess of just buying government bonds? And that’s really often referred to as excess returns. And so we started to think about excess returns versus the volatility of that, and we put those two components together. And, what we found was that, not that many investors were thinking the way that we were, and that seemed to be a good thing because we could look across these different sectors and we were coming up with some ideas that were different than others. So, for example, we were finding at the time that, what are sometimes called bank loans or leveraged loans or floating-rate loans looked really attractive on this framework, and people weren’t buying them in part because they had floating rates. And so, people wanted fixed-rate securities. They wanted to buy high yield. But we could use the resources that we had at Wellington to buy floating-rate securities and then use derivatives or other methods to get the interest-rate sensitivity that we wanted. So we could construct a better mousetrap, if you will, by putting together these different types of securities and thinking about them differently.

THOMAS MUCHA:  That’s interesting. So you’re combining your math background with your weird questions, with your collaborative nature and coming up with a differentiated view.

CAMPE GOODMAN:Yeah, and I think, one sign that, was both, I think, encouraging to the way that we were thinking about things, but also a little bit discouraging at the time was we put together our approach and it was very top-down focused, and so one of the products that we were working on was essentially looking across the different high-yield and credit markets and trying to find these different opportunities, and, we were told at the time, “That’s not the way to do it. If you’re gonna invest in the high-yielding credit markets, you have to think bottom up. Like, you have to know these securities really well. You’re doing it wrong.” When you’re told you’re doing it wrong, you can’t help but have two thoughts. One thought is, “Oh God, nobody’s ever gonna buy this. Nobody’s gonna want this.” But your other thought is, “Hey, we might be onto something, and maybe if we stick with it and we show that actually this works, and maybe people will come around.” And fortunately, that was what’s happened with us, is that we were able to do this and show that actually, we could generate good results and then a number of people now think, “Oh, of course, of course this is the way to do it. This is obvious.”

THOMAS MUCHA:  Yeah, Campe, you mentioned your collaborative style. I wanna dig into that a little bit here. I think there are probably few fixed-income investors who are more reliant on collaboration, than you. And of course, Wellington, celebrates collaboration. So how specifically, Campe, do you incorporate research from other investors and analysts around the firm? How does this work on a day-to-day basis?

CAMPE GOODMAN:I do really value collaboration at Wellington During one of our major meetings back in 2016, we were in this meeting and one of the high-yield investors, David Marshak, started really pounding the table, saying, “Hey, there’s this great sector that investors are overlooking, and don’t appreciate. It’s called, CoCos, or contingent convertibles, and these are subordinated securities that have been issued by these European banks, and they’re really undervalued. I thought I knew a lot and totally disagreed with him and thought they were probably a bad idea, but, because part of my process is, like, “Let’s engage, let’s talk to investors, and even if we think they’re wrong and talk to them about why they might be wrong,” I sat down with, Dave afterwards and, he made the case. And it didn’t take long before I became convinced that actually he was right and I was completely wrong and, there was a really good opportunity in this area. And we started to invest in CoCos back in 2016. And that was a really good additive investment for the portfolio. It was a area, again, where, Dave had this idea. Not a lot of investors wanted to invest. Many were very cautious of this area, and we understood why they were cautious. But we understood why the risk-adjusted return looked really good, and that’s the way that we were thinking about it. So we had these fixed-income investors who thought they were too risky. You had equity investors who just weren’t gonna look at a fixed-income security. And, one thing that Rob and I have found is we love these areas that kinda fall through the cracks a little bit, where they’re not loved by different groups of investors, and that was the case here. And so, that was one good example where, we were able to get involved, really by talking to, Dave, but also by talking to other Wellington investors and understanding what the risks were as well. 

THOMAS MUCHA:  So Campe, I want to put you on the couch here for a minute. What strikes me about your answers and your examples here is just how open and willing you are to listen to other viewpoints. And I’m curious, have you always been that way? I mean, even before you got to Wellington. I mean, what were you like as a kid? Did you play nicely with others? Or is that something that you specifically learned once you became an investor and saw that there was a material benefit to that sort of approach?

CAMPE GOODMAN:Boy, that’s a seriously deep question. I love that. no, I don’t think I was great at this as a kid, actually. But I do think where I learned it was before Wellington was actually in college. I had a couple of college roommates who I’m still in touch with today who were really among the brightest, most thoughtful people that I’ve ever met and also just deeply argumentative in the best possible way. And we had a lot of great debates, and I really was forced to learn that actually, my opinions were second-class, but I could learn a lot from them, and these are people who today are, professors and very high-powered attorneys and major executives and stuff like that. Also one’s a rabbi. They’re interesting folks. I learned a lot from that group, and I think that was where I really learned to engage respectfully and try to be a better listener. That was probably the thing I got most out of college, and maybe one of the things that’s really sustained me during my career.

THOMAS MUCHA:  Yeah, you can’t major in that, can you? So I’m gonna shift gears a little bit, Campe, and talk about some of the current market dynamics. So today, with markets grappling with multiple regime changes, multiple sources of uncertainty, there’s been a lot of debate about which historical time periods are the best analogues for understanding what’s going on today in the markets? Now, as you’ve alluded to, you’ve invested through multiple crises. You’re an astute student of markets. So what time periods do you find instructive for what might happen next in the current environment?

CAMPE GOODMAN:I do think a lot about the historical analogues ’cause I think that while the present period doesn’t necessarily -- it’s not exactly like any other, there are other time periods that it perhaps rhymes with. I might start with one that I reject a little bit because I think it’s important why I reject it, and that’s the 1970s. So a lot of people have worried that, like, “Ugh, this is like the 1970s because we’re experiencing high inflation, perhaps slowing growth.” You’ve heard some talk about stagflation. To me, the difference, this is particularly true for the US, and I wanna be sure that we’re careful globally, because it’s not true everywhere. But the big difference for the US is that we have a more hawkish, central bank here. So the Fed, I believe, is committed to getting inflation back down. And that alone is the subject of much debate and not something that everybody even at Wellington believes. But I do think that they’re committed to getting inflation back down. A couple of periods that I think a lot about are, the early 2000s or the late 1990s and the early 2000s. So that was a period when we had, really a big tech boom. Evaluations were high in part of the market. Things seemed like they were going really well until, eh, policy was too tight and then all of the sudden, we had these major, shocks that hit. And I always think about that period because it was bad for the economy, but let me tell you, it was terrible for credit markets. So I was actually first getting into markets in 2000 and, that was my timing was pretty bad. It was a terrible period to get into credit markets. Like, basically you had underperformance of credit in 2000. You had worse underperformance in 2001. You had, 9/11 and really these tough shocks. And then in 2002, you had even worse underperformance of credit as you had these corporate malfeasance scandals tied to Enron, WorldCom, Tyco, these companies back then. I don’t know that we’re in that period, but it’s a period that I still think about a lot, in terms of like, the worst thing for credit markets and the thing that we really wanna be careful about are these rolling periods of underperformance. The other risks, though, in the economy are more financial related right now, so, I think there’s still questions about the banks. We may get through that. There’re also a lot of risks right now in real estate still, which ties back to some of the early 1990s. So, I am focused on these different risks and I think they’re different from any one single period, but, I worry that, like, tight policy, still means that we could continue to have these shocks. 

THOMAS MUCHA:  So, Campe, let’s dig into that a little bit. Given that those historical analogues that you just pointed to, given those risks that you just highlighted, what are some of the specific areas of opportunity you think investors should be considering right now, or maybe reconsidering, going into 2024? And conversely, what should we stay away from?

CAMPE GOODMAN:One of the areas that I think is, most undervalued and underappreciated, is the emerging market corporate sector. So a lot of the risks that I’m highlighting of tight policy and some of these sorts of concerns are particularly focused on the US; less true in emerging markets. So emerging markets actually look better to me in that I think that a number of them -- and it depends on the place, but speaking, broadly -- a lot of emerging markets have actually gotten inflation under control. They’ve already done their tightening, and I think can perform pretty well. I also think emerging market corporates in particular, many of them, their revenues actually come from developed markets. So they can be more stable than their underlying countries, and you’re still getting a nice risk premium in a lot of places, particularly some of the, double B and single B, companies out there. A lot of them, they’re rated that way because they are located in some riskier places in the world, but they’re actually their revenues can be quite stable. And so, whether they are chemical companies or paper companies or, doing a number of different, other things like that, they can be, pretty stable. So that’s one area I would mention. Another area that we’re seeing opportunity, structured finance, and this is often a tough area for retail investors to buy. I think it’s easier for us as institutional investors to invest in commercial mortgage-backed securities, asset-backed securities, those types of things. Agency mortgages right now are actually, also quite attractive. These are areas of the market that we generally see value, and I think that’s for a combination of reasons. One the commercial real estate has been hard hit, particularly on the office side, and so I think that’s created a risk premium in that sector, so we’re starting to find more opportunities to invest. I think we’re getting closer to a bottom in the office cycle. We’re going to be talking less as we look forward, I think, about people leaving offices and more about return to work. When I think about asset-backed securities, I still think that the US consumer is holding up pretty well. So even though, I’m highlighting some of these risks on the corporate side, I think US consumers are doing fine. Labor market is strong. And so we’re going to continue to see people spend. And then, agency mortgages are another area where I see opportunities. I think, volatility as we look forward’s gonna be a little bit lower in rates, and that’s really good for mortgages.

THOMAS MUCHA:  What about things we should be avoiding?

CAMPE GOODMAN:So a couple of areas that I’m more cautious on, one is on the emerging market side. High-quality sovereign EM does not look as attractive. While I like EM corporates -- especially high-yield EM corporates -- sort of the opposite end of that are these high-quality, sovereign EM, issuers, and these I won’t name the specific countries. But, if you were to look them up on the higher-quality end of that spectrum, they’re not quite as attractive. Why have they gotten rich? I think that’s because there’s been really a lot of grab for anything that has a little bit of yield and is investment-grade rated and is diversifying. So that’s an area that I would generally avoid. More generally, I would say, longer-duration securities on the corporate side are not as attractive -- long corporates. I would focus more on the 5- to 10-year sector in corporates and stay away from the 30-year sector. Again, I think there’s just been this grab for some of the duration and the spread-duration out in those sectors. Those are areas that just don’t look as good right now.

THOMAS MUCHA:  All right. Campe, I wanna widen the lens a little bit here. So geopolitical risk, climate change, the energy transition. We’ve got a bunch of deep, structural factors that are impacting almost every corner of the markets, especially as more countries tie their climate ambitions to national security objectives. So why do these themes matter to a credit investor? And could these trends create new opportunities in credit?

CAMPE GOODMAN:I knew we’d get to geopolitics eventually, Thomas, ’cause I know who I’m talking to. But I do think that they are important to credit investors. And the way that I’ve thought about them is a couple of ways. The first is that, as something you’ve highlighted, geopolitics creates risks and in particular, I think, governance of countries creates risks. I think China’s an interesting one right now because there are both risks and opportunities, but I believe that one needs to be careful in terms of position sizing and thinking carefully about which securities you’re gonna buy. Doesn’t mean that you can’t invest and that doesn’t mean there aren’t gonna be opportunities. But we just wanna think careful about security selection and sizing. That said, one of the things that I think is really important is that geopolitics and geopolitical risk actually creates opportunities, and we’ve seen this after the outbreak of any sort of volatility in markets. During these times, there’s a lot of emotion and things that we are often feeling too. But we also try to just look at it very objectively, through our investment lens and try to think about where there are opportunities.

THOMAS MUCHA:  Yeah, that’s one of the messages that I try to extol at the firm to clients on this podcast is what’s happening in the geopolitical and policy environments is so disruptive on so many levels that it is creating all sorts of differentiation. And so there are opportunities amidst the risk. I think we need to broaden our thinking about it. What are the potential impacts here? What about the energy transition and climate change? How does that play into your thinking?

CAMPE GOODMAN:Yeah, I think the energy transition is really important and, if anything, I continue to believe that a lot of the companies that are positively involved in that transition are undervalued and underappreciated. There has almost been this very quick backlash to things like the energy transition to say, “Oh, there’s too much excitement in these areas. The companies that are involved are overvalued.” I can’t speak to the equity side, but on the fixed-income side, I think often the leaders in terms of getting more energy efficient, the leaders in terms of getting greener, using green power, are often, not always, but often still undervalued and are good just from a pure, hard-headed return perspective. And so, I think it’s important to stay very objective about it and not get too excited either way. Because I’ve seen people on both sides, both the people who are excited about the energy transition want to get involved, and then, the people who want to be doubters. They sort of think that they’re going against the grain. They’ve wanted to stay out of it and have missed good opportunities. So, there are areas that I don’t think are quite ready yet, like, blue bonds are an example where, it’s a great idea. People wanted to get involved in bonds that are helping to save the oceans. But the ones that have come to market so far, not really actually attractive from an investment standpoint. On the other hand, a lot of the green bond market has really matured and there used to be this idea of a greenium, a premium for buying green bonds. Often that’s not the case. Sometimes we’re even seeing a discount for buying green bonds and investors in certain areas don’t want to buy them and are staying away from them actively, and I think they can be quite attractive.

THOMAS MUCHA:  So you still wanna apply rigorous analytical framework to any of these trends.

CAMPE GOODMAN:Yeah, we just wanna look at what the value is and recognize that there is value in this transition. Eventually, markets are often rewarding the companies that are getting more energy efficient, that are, better in terms of their environmental practices. There’s real value, there’s financial value in that, and so it’s an area where actually I continue to believe that, the social positives and the financial positives actually often line up more than people think.

THOMAS MUCHA:  All right, Campe, I could go on for hours. I’m really interested in the way you think and I think this is a fascinating conversation. But I do have to close it up here, and I wanna end sort of with a big-picture question for you, which is, you’ve been here for a long time. During your long career, you’ve seen it all: cycles, credit crises, taper tantrums. What are the most important lessons that you’ve learned from these?

CAMPE GOODMAN:Yeah. I think, there are a couple of lessons that I’ve learned in my career and hopefully it’s not over yet. I guess, lesson number one does go back to that early period in my career when we had a few tough years in the credit markets, and we were long credit at the time and got longer credit. And that was through a really, really tough period. And one thing that I saw was my mentor, the person that I was working most closely with, an investor named L. T. Hill. He handled it with such, grace under pressure that it wasn’t even until later that I really realized, like, how much pressure he must’ve been under. So, I hope that first of all, one of the things that I’ve learned is just to stay even-keeled. To just keep asking questions. Hold onto your processing and keep doing the same things, because he, was able to turn all of that around, in 2003 when the markets came roaring back. And that was by, sticking to his process, and he did it in a way, as I said, that it really wasn’t until later that I realized how much pressure he must’ve been under. The second part of that was really about sticking to your process and believing in what you believed in, and, for me, a lot of that is valuation, being willing to not listen too much to others. To take a lot of information from them, but really, in the end, go the way that you think is right, and I think that was another, big lesson that I saw. The final lesson that I would mention, goes back to the financial crisis in the 2008 period, and as I reflected on that, I came out of that with two lessons. One was, again, a reinforcement of this idea that, like, if you went in with certain risky credits, a lot of them, you knew if you could just hold on long enough, they were going to be fine. And so you really did have to stick to your guns. But there was a second lesson too that was really important and that lesson was if you’ve been patient and had loaded up on too much of them going into that period, you were a lot better off because you had more opportunity to buy. And so I think one of the things that I really learned to improve after that period was our risk management and our patience and our willingness to say, when valuations were not great, just to be more patient and say, “You know what? We’re not gonna take too much risk.” That seems like an easy and obvious lesson, but, it’s a lesson that you kinda have to remember every few years. Like, we’re in another period right now where things seem pretty good but not amazing, and there’s a real temptation to, load up on risk and I’m trying to balance between really delivering good returns for my clients as we look into 2024, but also keeping some money available, some dry powder so that we can take advantage of opportunities when those big dislocations occur because goodness knows they will.

THOMAS MUCHA:  Campe, thank you so much. That was fantastic. Once again, Campe Goodman, fixed-income portfolio manager here at Wellington. 

CAMPE GOODMAN: Thanks, Thomas. It’s been a lot of fun. 

THOMAS MUCHA: And that’s a wrap for Season 2 at WellSaid. Please continue listening, and we’ll be back in early January.


Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For  professional/institutional investors only. Your capital may be at risk. Podcast produced December 2023.

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