US Elections wrapped into uncertainty. Biden hannounced that he will support Kamala Harris, but the exact path is uncertain. Whether this news gives former President Trump a boost in the polls, “this could provide a further boost to areas of the market that have priced in a greater chance of a Republican victory in November, such as financials and energy. If the opposite were to occur, it could be a advantage for sectors with a more global focus,” Lo explains Saira Malik, CFA, Chief Investment Officer of Nuveen.
US Elections and FED Cuts
In any case – explains the expert – “we expect volatility to increase in the short term due to heightened political uncertainty. One thing seems certain: there will be more twists and turns in the coming months. Last week’s wave of weaker-than-expected economic data, following the previous week’s release of lower-than-expected CPI inflation for Juneraises prospects of a Fed rate cut. Several FOMC members commented on the subdued economic data”
In general they stated that the Fed is “getting closer” to the point where a rate cut is warranted. With growing expectations that a rate cut cycle is approaching, now seems like a particularly good time to consider extending portfolio duration by shifting some assets out of short-term bonds and cash while also supplementing those with diversified credit exposure.
How to place the wallet?
“This could help investors reduce the reinvestment risk, increase income potential and provide a buffer against rate volatility. And with real yields (i.e. nominal yields minus taxes and inflation) on cash equivalents like six-month Certificates of Deposit currently near 0%, investors may find sectors that offer much more compelling real returns and total return potential than cash if U.S. Treasury yields decline from here, as we expect.”
Among the opportunities iinvestment gradesecuritized assets and preferred securities stand out. The securitization sector is not only attractively valued, but it is also one of the few areas of the market where spreads (the yield relative to Treasuries) are wider than their historical average, offering a favorable entry point.
Nuveen’s comment
Among the asset-backed securities (ABS), consumer and commercial credit performance “continues to stabilize. As for commercial mortgage-backed securities (CMBS), we see substantial reward potential for investors willing to accept the risks and challenges that office and retail real estate are facing. Finally, senior securities are supported by the strong fundamentals of US banks (the largest issuers), all of which recently passed the Fed’s 2024 “stress tests.” Senior loans and high-yield corporate bonds continue to impress. Senior loans remain one of the highest-yielding asset classes in global fixed income”.
The Fundamentals of Lending they remain solid, with refinancings at a healthy pace and borrowers continuing to push maturities forward. Demand is particularly strong due to the formation of collateralized loan obligations (CLOs), the primary buyer of senior loans. We expect healthy demand to continue, supporting high income and solid total return potential.
High-yield companies have benefited from the resilience of the US economy and also have healthy fundamentals. We expect – concludes Malik – “that the default rates rise when there are some signs of slowing economic activity, but only to levels close to their long-term average, as credit quality for the overall asset class has improved significantly in recent years. We look at non-cyclical sectors and higher-quality issuers with strong balance sheets, but also find attractive total return opportunities among good companies in sectors. Active management of the credit risk and selectivity are essential at a time when the economy is slowing and stock valuations are inadequate.”
