Key takeaways:
- Overall, the outlook is constructive with a cautious bias, as we believe the lowest cohorts of corporates and consumers will need to restructure their overleveraged balance sheets.
- For the rest of the year, primary issuance is likely to remain elevated, leading to spreads in Securitized Credit remaining much wider than corporate credit.
- We remain positioned in the higher quality segment of the market, where carry yields in high single digits are strongly appealing, with low spread duration.
We’re already about a third of the way through the year; what key themes have you been following in markets and specifically within Securitized Credit?
The narrative of immaculate disinflation and a comfortable soft landing has been challenged, as a result of persistently strong inflation data in the US, particularly in services. This is delaying the path of price cuts until later in the year, leading to an upward move in yields across the curve.
Growth data in the UK & Europe remains weak but improving from a low base, and inflation data has responded better, although rising yields in the US have also created upward moves in yields in the UK and Europe.
Unlike in October 2023, this wider move in yields hasn’t caused much pressure in risk assets, where a strong technical of inflows have supported credit spreads, and ultimately investors and the market have balanced out the upward move in yields with better underlying economic data to remain supportive of higher quality risk assets.
Spreads in corporate IG, high quality HY and leveraged loans have remained tight, and equity markets continue to show reasonable positive performance. This overall backdrop has been supportive for investors in Securitized Credit.
The positive sentiment for risk assets coming into the year has meant there has been a significant pick-up in gross supply across US and European ABS, RMBS/MBS and CLO markets but matched for the most parts by investor demand.
This has ultimately led to strong positive returns from a combination of high carry and modest spread compression. The upward move in yields hasn’t been completely pain-free for broader markets, with overleveraged corporates with weak fundamentals, and especially those with nearer-term maturities seeing significant underperformance.
