Fourth Quarter 2022
While the path to get us here has been painful, investable yields have the potential to meet the return objectives of pension plans, insurance companies, or other investors that may have been sitting on the sidelines—or taking undue risk within fixed income in a reach for yield. As always, we have to be mindful with credit selection and maintain a healthy amount of defensive skepticism in our allocations, particularly with the Federal Reserve (Fed) still hiking and a recession looming (if it isn’t already here), but our risk appetite is relatively strong right now. Our conviction is strengthened by the historically wide spreads and low dollar prices available in the market. The message from our sector teams is that it is now possible for investors to generate the income they require without taking excessive credit or duration risk.
Sector-Specific Outlooks In This Report
Rates: Duration Opportunities as Rates Rise
Investment-Grade Corporate Bonds: Focus on Long Duration at Attractive Valuations
High-Yield Corporate Bonds: Priced for a Net Downgrade and Default Cycle
Bank Loans: The Loan Dilemma of Higher Interest Rates
Municipal Bonds: Differing Values in Taxable vs Tax Exempt Munis
ABS-CLOs: Relative Outperformance Amid Volatility
Non-Agency RMBS: Select Opportunities in RMBS Despite Cooling Housing Market
CMBS: Balancing Negatives and Positives
Agency MBS: Historically Wide Spreads Signal Long Term Value
Commercial Real Estate: Calling an End to the Great Work-From-Home Experiment
Important Notices and Disclosures
One basis point is equal to 0.01 percent.
Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their values to decline. High yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility. Investors in asset-backed securities, including collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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