Chart in Focus: Compelling opportunities in four higher-yielding credit sectors

Campe Goodman, CFA, Fixed Income Portfolio Manager
Rob Burn, CFA, Fixed Income Portfolio Manager
2025-03-11
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

The views expressed are those of the authors 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.

Despite looming (and growing) economic recession risks, we see several potential opportunities in higher-yielding credit sectors (as shown in below chart). While these excess return forecasts assume that spreads will revert to their historical medians, our slightly more bearish forecast incorporates some degree of spread widening given our expectation for an economic slowdown. In our view, some of the most compelling opportunities in fixed income credit sectors include:

  • Additional Tier 1 European banks (AT1s/CoCos): Banks for which the trajectory of fundamentals remains positive and are trading below par, offer the potential for price appreciation if called by the issuer.
  • Credit risk transfer (CRT) bonds: These securities continue to be supported by strong housing data releases and a favorable technical backdrop: Supply remains limited while investor flows have been positive.
  • Agency mortgage-backed securities (MBS): Spreads on MBS have widened on the back of elevated rate volatility. MBS excess returns also tend to be less correlated with credit risk and hence add some diversification to credit portfolios.
  • High-yield derivatives: Within high yield, one of our highest conviction ideas is the price differential between high-yield credit default swaps (CDX) and their underlying cash bonds. Compared to history, high-yield CDX offers an attractive relative spread advantage to cash.

Conversely, emerging markets (EM) USD-denominated sovereign spreads remain in the tightest quintile relative to history. As a result, we think it is prudent to consider reducing EM sovereign exposure in favor of the opportunities outlined above.

Figure 1
chart in focus

Looking ahead, we believe that bouts of volatility in 2024 could generate greater idiosyncratic dispersion and create better entry points to add credit exposure. Despite economic and monetary policy uncertainty, we believe the potential upside from earning today’s historically high yields and being ready to take advantage of credit market dislocations as they arise outweigh the possible risk from rates moving higher. In our view, various dislocations in higher-yielding credit markets could offer the most compelling opportunities for asset owners in 2024, with a goal of pursuing yield and total return in a manner that is as efficient and risk-controlled as possible. We also think it is important for investors to stay flexible and nimble in an uncertain market landscape.

Experts

Related Fund

Read next

Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees. Source: Wellington Management

© 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. 

The content within this page is issued by Wellington Management Singapore Pte Ltd (UEN: 201415544E) (WMS). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Information contained on this website is provided for information purposes and does not constitute financial advice or recommendation in any security including but not limited to, share in the funds and is prepared without regard to the specific objectives, financial situation or needs of any particular person.   

Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk.  The price and value of investments is not guaranteed. The value of the shares of the funds and the income accruing to them, if any,  and may fall or rise. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. Investors should read the prospectus and the Product Highlights Sheet of the respective fund and seek financial advice before deciding whether to purchase shares in any fund. Past performance or any economic trends or forecast, are not necessarily indicative of future performance. Some of the funds described on this website may use or invest in financial derivative instruments for portfolio management and hedging purposes. Investments in the funds are subject to investment risks, including the possible loss of the principal amount invested. None of the funds listed on this website guarantees distributions and distributions may fluctuate and may be paid out of capital. Past distributions are not necessarily indicative of future trends, which may be lower. Please note that payment of distributions out of capital effectively amounts to a return or withdrawal of the principal amount invested or of net capital gains attributable to that principal amount. Actual distribution of income, net capital gains and/or capital will be at the manager’s absolute discretion. Payments on dividends may result in a reduction of NAV per share of the funds. The preceding paragraph is only applicable if the fund intends to pay dividends/ distributions.  Performance with preliminary charge (sales charge) is calculated on a NAV to NAV basis, net of 5% preliminary charge (initial sales charge). Unless stated otherwise data is as at previous month end. 

Subscriptions may only be made on the basis of the latest prospectus and Product Highlights Sheet, and they can be obtained from WMS or fund distributors upon request.  

This material may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.