Summer conjures up warm memories of family vacations, lazy days, endless ice cream, amusement rides, walks on the beach, barbeques, and of course, occasional heat waves. Bananarama’s summertime hit “Cruel Summer,” which touches on oppressive heat, climbed the Billboard charts in 1984. Appropriately, the music video was shot during a heat wave.
For some investors, it may seem like a cruel summer with limited opportunities to generate alpha. It certainly feels like most major markets are heating up as risk premiums continue to grind tighter, leaving investors commiserating. Amid a backdrop of strengthening economic activity and strong job growth, the equity markets are hitting new historical highs, while interest rate volatility is at historical lows.
This week’s chart highlights the range of spreads available in the past twelve months for various fixed income market sectors. While the majority of these are at or near their recent lows, pockets of opportunities still exist within the subsectors of these major categories.
In the commercial mortgage-backed security (CMBS) market, supply has recently picked up after light issuance, providing investors an opportunity to deploy cash. I continue to have a favorable view of multifamily fundamentals and maintain an overweight to both guaranteed and unguaranteed agency CMBS. For those who can give liquidity, investors can pick incremental yield in off-the-run securities trading at discounts. I have also found value in going down the risk spectrum in more seasoned bonds with attractive collateral performance.
Key TakeawayFor fixed income investors with specific mandates, it has become increasingly challenging to find value. Given strong market technicals and solid fundamentals, I feel credit spreads are biased to tighten further. On a positive note, for yield-driven investors, the recent rise in Treasury yields has provided some relief in the face of spread tightening.
While I remain cautious on going down the risk spectrum as a way to pick up incremental yield, lower rated securities with attractive collateral characteristics have more opportunity to outperform in the near-term. Overall, I recommend remaining up in quality and shorter in duration as a hedge against rising interest rates and unwinding of the Federal Reserve’s $4.5 trillion balance sheet.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
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