The valuations in the US bond markets have as a common denominator, given the lax interest rate policies by the Federal Reserve, which are not very attractive in general, but there are some voices that already speak of opportunities in the credit market, in municipal bonds and parts of the securitized market. Why can there be interest in these segments?
If something taught last year, that was the fact of paying more attention to evaluations. A year ago, no chief investment officer could have anticipated that a global pandemic would disrupt our lives for most of 2020. Still, they could suggest that valuations of a variety of asset classes, particularly credit, were approaching peak levels of several decades.
“While we expect corporate credit to be sustained in a global performance-seeking environment, the sector appears less attractive than at the beginning of this year,” he notes. Lisa Hornby, Director of Multisectoral Fixed Income of the United States of Schroders. With valuations at almost pre-pandemic levels, the expert considers that this year we should be more focused on the selection of assets and less on the allocation to the sector in a generalized way.
The context for fixed income is clear: investment grade index spreads are once again on the more expensive side of their history long-term. However, if one looks deeper, there are still opportunities within the market. Issuers within the travel, tourism, leisure and hospitality sector could still offer value to investors.
Many of these companies issued significant amounts of debt in 2020 to strengthen their liquidity position. “We hope that once we get through the worst of the virus, these issuers will focus on balance sheet management, which should lead to a stabilization of their leverage,” says Hornby.
In addition to starting to buy longer-duration bonds, the Fed may need to increase the pace of asset purchases and strengthen its statements on rate developments to help mitigate the impact of the looming “fiscal cliff.”
“This conjuncture should continue to be favorable for US Treasuries after the recent rise in yields and as markets undo the reflationary bets and refocus on the already familiar themes of flatter curves, expectations of contained inflation and the lower volatility of the rates ”, relates Andrea Iannelli, head of fixed income of Fidelity.
Attractiveness of municipal bonds
Against this backdrop, the municipal market has played an important role in portfolios in recent months and will likely continue to feature in them well into 2021.
“This segment experienced a drastic increase in emissions in 2020 when municipalities chose to take advantage of the market given the need for financing and the low interest rate environment”Comments Hornby.
Despite repeated concerns expressed by market participants, additional aid to municipalities has not yet materialized. Beyond the current political stance, we continue to believe that this support will come, although the amount will not be enough to fill budget gaps across the country.
The Schroders expert explains that any shortfall will surely be covered with layoffs, leave, reduced services and higher taxes. However, there are some specific subsectors and issuers that offer attractive valuations in today’s market.
“We see opportunities at issuers of essential services and revenue bonds such as airports, higher education, and sales tax-backed bondss, although in the short term they will continue to be questioned by Covid ”, says Hornby. Similarly, it is important to note that many of the issuers in this space entered this crisis from a position of strength and have a variety of different tools to face current challenges.
Good support for mortgage-backed securities
Because corporate credit valuations are normalizing, from Schroders they assure that they are looking for mortgage securitizations from state agencies. This is another sector that has lagged behind in the corporate credit rebound and is still trading at attractive valuations relative to its long-term history.
Given that the Federal Reserve is actively buying $ 40 billion of MBS (Mortgage-Backed Securities) from these agencies per month, and that interest rates will be anchored for years to come, they believe the technicalities the market will continue to be well anchored.
“We will look at this sector as an indicator of liquidity, but with better income prospects than the US Treasury marketHornby concludes.