Fixed Income Investing in 2020
Q&A with Michael Buchanan, Western Asset’s Deputy Chief Investment Officer
Last year brought a host of serious concerns – trade tensions, Brexit and a possible U.S. recession, to name a few. But those concerns have receded for now, according to Michael Buchanan, Western Asset’s deputy chief investment officer, and 2020 is shaping up to be a good year in the capital markets in general and fixed-income specifically.
How do you view investing opportunities in the new year?
In late 2018, we felt the Fed was overly hawkish and rates were too high, reflecting perhaps too much optimism about growth and inflation. Ultimately, the Fed pivoted to a more accommodative stance in early 2019 which was in line with our view.
2020 is going to be a more challenging year for investing because rates are lower and spreads are tighter. While the first half of the year could see a fairly smooth ride, the second half may introduce bumpier terrain on trade and the run-up to U.S. elections. You need to make sure that your portfolio is resilient throughout this period. The good news is that whether you’re talking corporate credit, structured products or emerging markets securities, we’re seeing reasonably strong fundamentals. Consumers are in good shape. Banks are strong and actively lending. The U.S. real estate market is also performing well. We think opportunities will present themselves in periods of market volatility and in the new-issue bond market.
Are there certain industries that interest you?
There are a lot of sectors that we like, including banks, energy and metals & mining. We’re focused on those investment-grade and high-quality, high-yield companies that we believe have a relatively low degree of vulnerability to trade tensions.
We also see idiosyncratic opportunities within the CCC rated corporates space. Now we don’t advocate randomly buying a diversified pool of CCC issuers, but if you do your homework we think you can find compelling value in some unloved and overlooked credits. This is one of the ways active managers can distinguish themselves.
What’s your view on emerging market securities?
We’ve been constructive on emerging markets for a while, especially on local currency EM debt. We’re now seeing opportunities in EM corporate credit where leverage is low compared with the US investment-grade market. EM single A and BBB credits, in particular, offer a yield advantage over similarly rated U.S. issuers. While the incremental spread pickup has come down as of late, it’s still pretty generous.
How do you view primary issuances versus secondary issuances?
There were times in late 2018 and early 2019 when it was a buyers’ market and we were extremely active in new issues. Given the low rates in the U.S. and around the world, it’s not surprising that a number of large issuers have come to the market in the last year. Because of our size and scale, not only can Western Asset get very involved in the primary market, but we can also have a strong voice in terms of how these issues are structured.
But, like any other market, issuance ebbs and flows. Right now, we’re being a lot more selective and investing in those credits that give us stable, consistent cash flow.
How is Western Asset responding to these conditions?
For 2020, we’re focused on dynamic sector allocation – taking advantage of pockets of opportunity, making the right allocations and moving quickly. As an example, we like bank loans right now. Investors are justifiably concerned about “covenant light” bank loans and the amount of second-lien issuance in this space. But there are many features that we can negotiate to give us a very strong claim on assets in case trouble arises. Despite its underperformance in 2019, we think this asset class will continue to benefit from a lot of the fundamental strength that we’re seeing in corporate credit.
Related to that, we think there are some value opportunities in BBB and BB rated tranches of collateralized loan obligations (CLOs), especially when you compare their yields with the high-yield market. Again, you’ve got to be dynamic to take advantage of these fleeting opportunities.
Michael Buchanan is Deputy Chief Investment Officer at Western Asset, a subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.
Michael Buchanan, Deputy Chief Investment Officer, Western Asset Management
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