Fixed Income: Keeping an Eye on Inflation and Rising Rates
Air Date: April 7, 2021
Hi, I’m Chris Gizzo, a portfolio manager of multi-sector and high yield bond products at Lord Abbett.
Interstitial: Economic and Market Backdrop
So we had a fairly volatile end to the first quarter, especially underneath the surface in equities, as markets grapple with the pace of reopening and the impact of stimulus and what that means for the rate and inflation outlook. Looking into the rest of April, maybe we get a period of relative calm, some stability in rates or even a reversal in some of the pockets of weakness that we saw in the first quarter. And we are looking forward to what should be a very strong start to earnings season, that is coming up shortly.
On rates, which was the source of much of the volatility that we saw in Q1, it's interesting to note just how much is priced into the market at this point. As you can see, longer term rates failed to make new highs following immediately after some of the infrastructure details on stimulus that just came out.
But we are going to stay highly focused on the longer term outlook of rising inflation and higher interest rates in the US that will coincide with a very strong economic recovery and very strong fiscal policy.
That is still an environment that we think highly favors down-in-quality credit spread compression opportunities, and on an industry level, commodities, consumer discretionary, and economic reopening beneficiaries.
Those themes point our positioning on fixed income side very much toward a combination of high yield and bank loans and something like CMBS where you are still getting wider spreads, as you move up in quality.
Those asset classes have been relatively stable over the past month even as volatility grows elsewhere--that's most understandable in bank loans, given the interest rate protections that you have there, but it was also very true in high yield and CMBS as well and that speaks to the very strong and improving fundamental backdrop for those asset classes.
Focusing on the high yield asset class, which is our largest exposure--right now, you are being paid about three and a half percent over comparable Treasuries and, in our opinion, we can see that relationship tighten by around a half a percent so you can get price appreciation in the near term, in addition to very attractive carry.
Thank you very much for listening and thank you for your continued interest in Lord Abbett.________________________________________
Commercial mortgage-backed securities (CMBS) are secured by mortgages on commercial properties rather than residential real estate. The underlying loans that are securitized into CMBS include those for properties such as apartment buildings and complexes, factories, hotels, office buildings, office parks, and shopping malls.
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