The emerging theme from our Sector Teams in this edition of Fixed Income Sector Views is that the market has come around to the view that the Federal Reserve’s (Fed) hiking cycle is nearing its end. This is an important and bullish transition in investor psychology and has led asset allocators to rethink their exposure to fixed income. The subsequent recovery in credit has been disproportionate and led to some dispersion among sectors. This presents a compelling opportunity for some opportunistic repositioning. Most attractive to us are the dislocations in higher quality structured credit, where spreads remain historically wide relative to corporate credit. In addition, significantly discounted dollar prices offer attractive convexity and total return potential. While future Fed policy is uncertain and the risk of recession is rising, fixed income can again add both income and correlation benefits to a diversified portfolio.
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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