View from the Top: Opportunities in High-Quality Credit
Sep 28, 2023
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Join Edwin Wilches, Co-Head of Securitized Products at PGIM Fixed Income, as he sheds light on the current landscape of high-quality credit investments. He discusses how solid nominal yields and reasonable credit spreads create attractive opportunities for fixed income investors. The conversation highlights the evolving interest rate landscape and the impact of macroeconomic trends on corporate credit. Wilches also emphasizes the importance of strategic allocations in mitigating risks and enhancing returns, especially in challenging economic conditions.
Current market conditions indicate that investment-grade corporate credit, with its attractive nominal yields and decreasing recession risks, presents a compelling opportunity for fixed income investors.
Structured products, particularly top-tranche offerings, are gaining traction for their appealing spread opportunities and lower default risk amid current market discrepancies.
Deep dives
High-Quality Credit Opportunities
Current market conditions present favorable opportunities in high-quality credit due to healthy nominal yields, reasonable credit spreads, and positive credit fundamentals. The discussion highlights that a resilient economy supports these investment options, with a modal outlook suggesting that the economy will sustain below-trend growth combined with elevated inflation. This scenario implies that while spreads may not drastically tighten, investors can still benefit from secure income and yield, particularly within the investment-grade corporate credit sector, which offers one of the best yield environments in a decade. Factors leading to this situation include reduced recession probabilities and a shift from macro to micro analysis in investment strategies, allowing for better sector-specific opportunities.
Investment-Grade Corporate Credit Insights
The investment-grade corporate credit segment is showing promising signals as nominal yields have rebalanced and are expected to remain elevated due to a potentially fading inflation context and nearing end of the Federal Reserve's rate hikes. With a reduction in recession risk, highlighted by a probability adjustment from 50% to 25%, there is an optimistic outlook for corporates, particularly in regulated sectors such as banks and utilities. Investors are encouraged to engage with high-quality bank credits that offer compelling spreads, as regulations emphasize their stability. Utilities also present an attractive option for investment due to their reduced cyclicality and strong fundamentals, allowing investors to potentially achieve better risk-adjusted returns.
Structured Products as Attractive Investments
Structured products are gaining attention for their attractive spread opportunities, particularly amidst a backdrop of perceived oversupply in certain asset classes compared to historical norms. Key asset types like CLOs, CMBS, and unsecured ABS are expected to deliver superior returns, especially in resilient segments such as residential housing, which shows strong fundamentals. However, areas like commercial real estate exhibit uncertainty and suggest caution when assessing potential investments. The podcast emphasizes that top-tranche structured products are appealing, as they carry less default risk, positioning investors to capitalize on current market discrepancies without incurring excessive risk.
Municipal Bonds and Market Dynamics
Municipal bonds are viewed positively within current conditions, thanks to their interest rate sensitivity and enhanced yields resulting from prolonged low rates. The backdrop of rising interest rates creates a compelling opportunity for investors to exploit higher yields while also benefiting from tax shields provided by munis. The current yield ratios show historical averages favoring tax-exempt investments, presenting attractive opportunities for tactical deployment of cash. Given the durable nature of municipal credits and the low default rates in this asset class, it stands out as a solid choice for conservative investors seeking income and stability.
With our macro base case calling for below trend, but positive growth and elevated inflation, we see a fairly healthy environment for credit and credit returns looking forward. In this episode of All the Credit®, we’ll take a closer look at the high-quality credit spectrum, where solid nominal yields, reasonable credit spreads, and durable credit fundamentals could be attractive to fixed income investors. Alternatively, even if the economy proves less resilient than expected, tactically allocating to high-quality credit can provide reasonable insulation from outside drawdowns and downturns.
Hosts Brian Barnhurst, CFA, Co-Head of Credit Research, and Mike Collins, CFA, Senior Portfolio Manager, Multi-Sector Strategies, have invited three of our senior investment professionals to discuss the opportunities they see within Investment Grade Corporates, Securitized Credit, and Municipal Bonds: Dave Del Vecchio, Co-Head of U.S. Investment Grade Corporate Bonds, Edwin Wilches, CFA, Co-Head of Securitized Products, and Sean McCarthy, Head of Municipal Bond Research.
Recorded on September 21, 2023.
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