- Fixed Income Portfolio Manager
Asset classes
Hong Kong (香港), Individual
Change
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
When I published my 2023 credit market outlook back in October 2022, I advocated for a defensive portfolio risk posture amid growing recession risks, while still preserving sufficient cash/liquidity to take advantage of anticipated market dislocations. Following a rally in many market segments, I’ve observed a shift in credit risk and sector rotation opportunities.
While I still favor defensive positioning from a tactical perspective, in the wake of last year’s sharp rise in yields, I believe higher-yielding credit sectors overall appear attractive over a three-year investment horizon and are trading close to their median spread levels as of this writing.
Don’t count on a soft landing
Since my last outlook, many areas of the credit market have rallied on optimism that moderating inflation would soon enable central banks to pause their rate-tightening campaigns. Following a decline in government bond yields and a compression of credit spreads, certain fixed income sectors look less attractive today than they did a few months ago.
Is the optimism warranted? I fear not. In my view, economic risks have not dissipated, and many developed market central banks appear more steadfast in their resolve to tame persistent inflation. Some of the credit market indicators I monitor have indeed improved at the margins, including rosier corporate management outlooks and declining commodities prices. But the monetary policy regime remains a headwind, and I suspect it will be very challenging for central banks to engineer a soft landing. Still, I see several potential opportunities in select higher-yielding credit sectors (Figure 1).
Figure 1
Where are the opportunities?
While I maintain a bias toward defensive positioning, I continue to see opportunities to potentially add value by selectively increasing credit risk and rotating among credit sectors.
Previously, some of the most attractive opportunities could be found in European contingent convertibles (CoCos), credit risk transfer (CRT) bonds, high-yield credit derivatives, and emerging market (EM) corporate bonds. Today, I see more compelling value in US non-agency residential mortgage-backed securities (RMBS), European credit and banks, and high-yield EM corporate bonds.
- RMBS: Housing data, including affordability of new homes, have deteriorated significantly over the past year, driven in part by substantially higher mortgage rates. But the tailwind of low housing supply, combined with record amounts of homeowner equity and conservative underwriting standards, create a favorable backdrop for housing fundamentals. I believe most seasoned bonds have accumulated enough structural support from embedded home-price appreciation and previous prepayments that they can withstand meaningful home-price declines. Within RMBS, CRT bonds look particularly attractive.
- European corporate bonds: I still favor CoCos and expect these issuers to remain resilient, despite the headwinds posed by the ongoing Russia/Ukraine conflict and potential stagflation (high inflation together with low growth) later this year. In addition, European investment-grade corporates appear to offer better value than their US counterparts, given a significant spread advantage.
- High-yield EM corporates: Spreads for emerging market high-yield corporates have rallied to a lesser degree than their investment-grade counterparts and stand to potentially benefit from improved cash flows and lower debt loads. Investors may want to focus exposures on companies with prudent balance-sheet management within the oil & gas, telecom, utilities, and infrastructure sectors.
Bottom line: Stay nimble
To be clear, I still believe credit market volatility and challenging liquidity conditions in the coming months could offer entry-point opportunities that are more attractive than I am seeing right now. It’s premature for central banks to “declare victory” over inflation, and I suspect we could be in for additional market volatility going forward. Accordingly, investors should be ready to move quickly if they wish to exploit market inefficiencies and credit dislocations that may arise, whether induced by central bank actions or by sudden, unanticipated market events. Above all, stay nimble.
Expert
Related insights
Showing
of
Insights Posts
Rate relief: Fed cuts half point, but says “economy is strong”
Continue reading
3
min
Article
2025-09-30
Chart in Focus: Four key areas of opportunities in bonds amid Fed uncertainty
Continue reading
3
min
Article
2025-07-31
URL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Read next
Showing
of
Insights Posts
Time for bond investors to take the wheel?
Volatility makes bond investing less straightforward, but it can also create opportunities, provided investors are in a position to "take the wheel" in order to capitalise on them.
8
min
Article
2025-11-30
Are bond investors ready for a US industrial revolution?
Portfolio Manager Connor Fitzgerald discusses why bond investors should ready themselves for a potential US industrial revolution and shares his perspective on how to reposition portfolios for such a scenario.
6
min
Article
2025-10-31
What's current in credit?
In this short video series, Fixed Income Portfolio Manager Connor Fitzgerald takes a look at what's current in credit. Given rather tight credit spread valuations, what is Connor's outlook for the next twelve months and where are the opportunities and risks now?
5
min
Video
2025-10-31
Rate relief: Fed cuts half point, but says “economy is strong”
Our expert explains the Fed's bold rate cut and some key takeaways for investors.
3
min
Article
2025-09-30
Chart in Focus: Four key areas of opportunities in bonds amid Fed uncertainty
We discuss four key areas of opportunities in fixed income amid Fed uncertainty in the second half of the year.
3
min
Article
2025-07-31
Time for credit selection to shine
Fixed income investors continue to seek answers to an era of volatile rates. Large, static exposures to credit markets no longer cut it. Instead, a nimble and dynamic approach is more likely to create resilient and consistent total return outcomes.
5
min
Article
2025-07-31
Capitalizing on rate shifts: Parsing opportunities in the second half
Fixed Income Portfolio Manager Campe Goodman and Fixed Income Strategist Amar Reganti discuss how to capitalize on potential rate shifts in the second half of the year
7
min
Article
2025-06-30
Reframing fixed income portfolios: why bond maths makes the difference
It is easy to understand why fixed income investors tend to focus on yields. But investors who focus too much on yield may run the risk of overpaying for income and underestimating the impact of price volatility.
5
min
Article
2025-06-30
Looking beyond yield: Rethinking the approach of fixed income investing
Investors face a new regime, challenging traditional assumptions about returns and volatility. With central bank interventions impacting credit markets, it’s time to rethink income allocations. Rather than fixating solely on yield, consider a dynamic approach, presented by Connor Fitzgerald.
5
min
Article
2025-05-31
New era demands a nimble approach to credit
Our expert explains why deep research and an active approach are effective ways for fixed income investors to uncover credit opportunities in today's market.
5
min
Article
2025-05-31
Chart in Focus: Compelling opportunities in four higher-yielding credit sectors
Portfolio Managers Campe Goodman and Rob Burn share insights on where they are seeing compelling opportunities in high-yielding credit sectors.
Quick Take
2025-03-11
URL References
Related Insights
DISCLOSURE
This material and its contents may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management. This document is intended for information purposes only. It is not an offer or a solicitation by anyone, to subscribe for shares in Wellington Management Funds (Luxembourg) III SICAV (the Fund). Nothing in this document should be interpreted as advice, nor is it a recommendation to buy or sell shares. Investment in the Fund may not be suitable for all investors. Any views expressed are those of the author at the time of writing and are subject to change without notice. Investors should carefully read the Key Facts Statement (KFS), Prospectus, and Hong Kong Covering Document for the Fund and the sub-fund(s) for details, including risk factors, before making an investment decision. Other relevant documents are the annual report (and semi-annual report).
© 2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results.
Issued by Wellington Management Hong Kong Limited. Investment involves risk. Past performance is not indicative of future performance. This document has not been reviewed by the Securities and Futures Commission of Hong Kong.
