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Treasury and credit markets continued to be highly volatile in October thanks to a combination of inflation, aggressive central bank actions and recession concerns. These conditions, however, meant continued opportunities for the Multi-Asset Credit strategy group.
“Investors in commercial mortgage bonds benefit from higher yields, now north of 10–11%1 on debt with BBB- ratings, when looking at pools of different property loan types. Those deals also have more conservative underwriting standards than in the run-up to the global financial crisis.”
1 Source: Bloomberg.
| Neutral Mix | October Tactical Tilt | |
| IG corps | 20% | -10% |
| Securitized | 15% | 10% |
| Private credit | 15% | 0% |
| High yield bonds | 25% | -2% |
| Bank loans | 10% | 2% |
| Narrowly syndicated | 15% | 0% |
| October tactical allocation | September tactical allocation |
| 10% | 10% |
| 25% | 25% |
| 15% | 15% |
| 23% | 23% |
| 12% | 12% |
| 15% | 15% |
Despite a relatively tame month in October, Treasury and credit markets continue to be highly volatile, with inflation, aggressive central bank action and recession fears dominating headlines. We continue to take advantage of market volatility though security selection and relative value trading. Yields on investment grade (IG) bonds, securitized and high yield bonds continue to be high and at attractive levels.
Within IG, we maintain a tilt toward securitized assets with an underweight to public corporate bonds due to favorable relative yields from the former. Within the securitized space, we have a preference for asset-backed securities (ABS), where fundamentals are strong and prospects for fast tightening are positive. Spreads for commercial mortgage-backed securities (CMBS) have further widened and continue to present an inexpensive entry point. Within CMBS, we currently favor multi-family apartments. Collateralized loan obligations (CLOs) in the A–BBB range present an opportunity for well-protected yet inexpensive credit.
Across high yield, yields are elevated, suggesting that buyers are being well compensated for risk. Corporate balance sheets are in good shape with reasonable leverage ratios. At this time, we maintain a slight tilt to loans over bonds given loans’ floating-rate nature. We are positioned defensively, given the risk of a potential recession driven by the U.S. Federal Reserve tightening more than expected. We favor credits in the BB–B range.
We remain positive on our specialty asset classes - securitized, private credit and narrowly syndicated.
SLC Management multi-asset credit strategy – summary guidelines |
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| Benchmark: | 50% Bloomberg Barclays US Intermediate Credit Index, 25% ICE BofAML US High Yield Index, 25% S&P/LSTA Leveraged Loan Index |
| Performance target: | Benchmark plus 150 basis points, gross of investment management fees (but net of Operating Expenses), over a market cycle |
| Duration | 2–5 years |
| Credit quality: | BBB/BB average |
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