#HighYieldCredit #IncomeInvesting #CMBS
- The Federal Reserve (Fed) is set to begin pulling back the stimulus provided at the onset of the global public health crisis, intensifying the search for yield1.
- We continue to seek yield opportunities with a flexible fixed-income approach2.
The search for yield1 is intensifying among investors as the Federal Reserve (Fed) is set to begin pulling back the stimulus provided at the onset of the global public health crisis. The US central bank officially announced its plans to taper its net asset purchases by US$15 billion per month beginning in mid-November 20213
- Our Global Fixed Income, Currency & Commodities (GFICC) team believes the Fed is likely to stay the course and taper at a steady pace of US$15 billion per month allowing quantitative easing (QE) to be fully phased out by June 2022.
- Nevertheless, despite the end of asset purchases, our GFICC team expects the Fed to keep policy accommodative due to elevated unemployment and still-depressed labour force participation. For this reason, our GFICC team does not expect the Fed to hike rates until they have had sufficient time to re-assess the landscape post QE.
- The length of the pause between the end of taper and the first hike will be dependent on job growth, the trajectory of the core inflation profile, and an assessment of long-term inflation expectations.
Interest rates and inflation1,4
Why we are employing a flexible fixed income strategy
- Our Income Strategy strives to create a diversified portfolio of risk premiums seeking to deliver yield1 that is not correlated in day-to-day price movements. We harvest high-conviction ideas across the bond universe, covering both traditional and extended sectors, aiming to deliver a wider source of income2.
- The global bond market has grown to about US$132 trillion5 and presents a wide range of income sources. With flexibility across sectors and geographies, our Strategy endeavours to generate consistent yield under different market conditions.
- We continue to be positioned in shorter duration and higher quality high-yield (HY) corporates. US HY corporate bonds remain one of the leading sources of returns, as of 30 September 20216. Fundamentals within the HY1 market are relatively attractive4, supported by robust growth and strong corporate earnings.
- Active management, which integrates macro views and the bottom-up, yield-focused insights of asset class specialists, is crucial in tapping quality income opportunities.
- Securitised assets7 such as non-agency mortgage-backed securities (non-agency MBS) and commercial mortgage-backed securities (CMBS) have been among the leading drivers of returns for the Strategy. Non-agency MBS continue to be supported by both the strength of the US housing market and US consumer fundamentals. CMBS are supported by vaccination progress in the US, expanded mobility and travel among the general population, the continued decline in loan delinquencies and improvements in commercial real estate fundamentals. The dynamics surrounding multi-family CMBS and the long-term demographic trends continue to support fundamentals for those properties.
Under current market conditions, we believe that being diversified and tapping into relatively attractive income and risk-adjusted opportunities by investing flexibly across multiple debt markets will continue to be crucial.