2024 Midyear Fixed Income Outlook: Keep the Barbells, But Diversify Your Weights

Our key view for the remainder of 2024 is that investors should not assume a hyper-defensive stance, despite the seemingly high valuations: rather, they should maintain the barbelled approach we had advocated to start the year but with an increased focus on diversifying risks at one end while looking beyond cash at the other. Such diversification extends to potential geographic benefits in assets like emerging market corporate credit, rather than an argument for excess yield pickup.

Looking at specific areas of opportunity, leveraged loan yields are still in the 9%-10% range, which is attractive on a risk-adjusted basis, with superior relative value in the B-flat and B+ rating segments. In CLOs, given tighter valuations and risks that are tilted to the downside, we favor positioning higher in the capital stack overall and taking advantage of new issue yield premiums to secondary spreads.

In high yield, while the CCC-and-below segment shows elevated spreads, many issuers are facing idiosyncratic issues, and we believe now is not the time to overweight that segment. From a geographic standpoint, Asia’s high yield market continues to offer an attractive spread advantage despite some compression.

For investment grade, longer-end credit spreads are trading at ultra-tight levels, whereas intermediate credit still offers reasonable compensation, in our view.

Mortgage-backed securities (MBS) remain cheap versus corporates on a relative basis, but the technical factors behind this outcome are not necessarily going to reverse in the near term.