- Fixed Income Portfolio Manager
Singapore, Individual
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
When I published my 2023 credit market outlook back in October 2022, I advocated for a defensive portfolio risk posture amid growing recession risks, while still preserving sufficient cash/liquidity to take advantage of anticipated market dislocations. Following a rally in many market segments, I’ve observed a shift in credit risk and sector rotation opportunities.
While I still favor defensive positioning from a tactical perspective, in the wake of last year’s sharp rise in yields, I believe higher-yielding credit sectors overall appear attractive over a three-year investment horizon and are trading close to their median spread levels as of this writing.
Don’t count on a soft landing
Since my last outlook, many areas of the credit market have rallied on optimism that moderating inflation would soon enable central banks to pause their rate-tightening campaigns. Following a decline in government bond yields and a compression of credit spreads, certain fixed income sectors look less attractive today than they did a few months ago.
Is the optimism warranted? I fear not. In my view, economic risks have not dissipated, and many developed market central banks appear more steadfast in their resolve to tame persistent inflation. Some of the credit market indicators I monitor have indeed improved at the margins, including rosier corporate management outlooks and declining commodities prices. But the monetary policy regime remains a headwind, and I suspect it will be very challenging for central banks to engineer a soft landing. Still, I see several potential opportunities in select higher-yielding credit sectors (Figure 1).
Figure 1
Where are the opportunities?
While I maintain a bias toward defensive positioning, I continue to see opportunities to potentially add value by selectively increasing credit risk and rotating among credit sectors.
Previously, some of the most attractive opportunities could be found in European contingent convertibles (CoCos), credit risk transfer (CRT) bonds, high-yield credit derivatives, and emerging market (EM) corporate bonds. Today, I see more compelling value in US non-agency residential mortgage-backed securities (RMBS), European credit and banks, and high-yield EM corporate bonds.
- RMBS: Housing data, including affordability of new homes, have deteriorated significantly over the past year, driven in part by substantially higher mortgage rates. But the tailwind of low housing supply, combined with record amounts of homeowner equity and conservative underwriting standards, create a favorable backdrop for housing fundamentals. I believe most seasoned bonds have accumulated enough structural support from embedded home-price appreciation and previous prepayments that they can withstand meaningful home-price declines. Within RMBS, CRT bonds look particularly attractive.
- European corporate bonds: I still favor CoCos and expect these issuers to remain resilient, despite the headwinds posed by the ongoing Russia/Ukraine conflict and potential stagflation (high inflation together with low growth) later this year. In addition, European investment-grade corporates appear to offer better value than their US counterparts, given a significant spread advantage.
- High-yield EM corporates: Spreads for emerging market high-yield corporates have rallied to a lesser degree than their investment-grade counterparts and stand to potentially benefit from improved cash flows and lower debt loads. Investors may want to focus exposures on companies with prudent balance-sheet management within the oil & gas, telecom, utilities, and infrastructure sectors.
Bottom line: Stay nimble
To be clear, I still believe credit market volatility and challenging liquidity conditions in the coming months could offer entry-point opportunities that are more attractive than I am seeing right now. It’s premature for central banks to “declare victory” over inflation, and I suspect we could be in for additional market volatility going forward. Accordingly, investors should be ready to move quickly if they wish to exploit market inefficiencies and credit dislocations that may arise, whether induced by central bank actions or by sudden, unanticipated market events. Above all, stay nimble.
Expert
Related insights
Showing
of
Insights Posts
URL References
Related Insights
Read next
Showing
of
Insights Posts
Chart in Focus: Compelling opportunities in four higher-yielding credit sectors
Portfolio Managers Campe Goodman and Rob Burn share insights on where they are seeing compelling opportunities in high-yielding credit sectors.
Quick Take
2025-03-11
Credit: Better opportunities to add risk on the horizon
ur experts review current macro dynamics impacting the bond market and discuss where they see opportunities and risks across credit sectors.
Article
2024-12-31
Why cash won’t cut it for long: The case for bonds
Global Investment and Multi-Asset Strategist Nanette Abuhoff Jacobson and Investment Strategy Analyst Patrick Wattiau explore the relative potential benefits of bonds versus cash.
Quick Take
2024-08-31
Credit market outlook: Expect greater opportunities in back half of 2023
Against a backdrop of elevated recession risks and banking-sector stress, Fixed Income Portfolio Manager Rob Burn identifies relative-value sector opportunities in the credit market.
Article
2024-06-30
Will higher rates sap US consumer spending?
Higher interest rates have increased borrowing costs. Could a consumer-led US recession be looming? Fixed Income Portfolio Manager Kyra Fecteau sees three factors that may help mitigate the impact.
Quick Take
2024-03-31
Deep and diverse: Welcome to today’s Asia credit market
Two of our Singapore-based experts on Asia credit discuss the market's key features, along with how it's evolved and is likely to continue doing so.
Whitepaper
2024-03-31
Credit investing against a slower-growth, higher-inflation backdrop
The significant flattening of the US Treasury yield curve in recent months has some prognosticators calling for an impending US recession. Not so fast, says Fixed Income Portfolio Manager Rob Burn.
Continue reading
Quick Take
2022-07-31
Bank loans: Resiliency amid volatility
In the face of ongoing geopolitical and macroeconomic uncertainty, including the prospect of steadily rising interest rates, our floating-rate bank loan team maintains a bullish outlook for the sector. Emboldened by a strong US economy and mounting inflationary pressures, the US Federal Reserve (Fed) enacted its first 25 basis-point (bp) increase in interest rates since 2018. Additionally, Fed Chair Jerome Powell’s recent rhetoric has become more hawkish, including suggesting the possibility of a 50 bp rate hike in the coming months. The market is now pricing in the fed funds rate to rise to around 2.5% by the end of 2022 (from its current target of 25-50 bps).
Continue reading
Quick Take
2022-07-31
URL References
Related Insights
Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees. Source: Wellington Management
© 2023 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results.
The content within this page is issued by Wellington Management Singapore Pte Ltd (UEN: 201415544E) (WMS). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Information contained on this website is provided for information purposes and does not constitute financial advice or recommendation in any security including but not limited to, share in the funds and is prepared without regard to the specific objectives, financial situation or needs of any particular person.
Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed. The value of the shares of the funds and the income accruing to them, if any, and may fall or rise. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. Investors should read the prospectus and the Product Highlights Sheet of the respective fund and seek financial advice before deciding whether to purchase shares in any fund. Past performance or any economic trends or forecast, are not necessarily indicative of future performance. Some of the funds described on this website may use or invest in financial derivative instruments for portfolio management and hedging purposes. Investments in the funds are subject to investment risks, including the possible loss of the principal amount invested. None of the funds listed on this website guarantees distributions and distributions may fluctuate and may be paid out of capital. Past distributions are not necessarily indicative of future trends, which may be lower. Please note that payment of distributions out of capital effectively amounts to a return or withdrawal of the principal amount invested or of net capital gains attributable to that principal amount. Actual distribution of income, net capital gains and/or capital will be at the manager’s absolute discretion. Payments on dividends may result in a reduction of NAV per share of the funds. The preceding paragraph is only applicable if the fund intends to pay dividends/ distributions. Performance with preliminary charge (sales charge) is calculated on a NAV to NAV basis, net of 5% preliminary charge (initial sales charge). Unless stated otherwise data is as at previous month end.
Subscriptions may only be made on the basis of the latest prospectus and Product Highlights Sheet, and they can be obtained from WMS or fund distributors upon request.
This material may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.
