UBS shared its outlook on fixed income and high yield credit in a strategy piece. Overall, the bank is moderately bullish on the asset class, especially at the short-end of the curve, but doesn’t believe returns will be as strong as the first-half of the year.

Overall, it attributes strength in the riskier parts of the fixed income universe to a stronger than expected US economy which has kept the default rate low. This has been sufficient to offset the headwind of the Fed’s ultra-hawkish monetary policy. 

The bank attributes the economy’s resilience to lingering effects of supportive fiscal and monetary policy and the strong labor market. It’s a different type of recovery than what we have seen in the past where financial assets inflated while the real economy struggled. 

However, UBS believes that the default rate should continue to tick higher so it recommends a neutral positioning. It also sees a correlation between equity market volatility and high-yield credit. While this was a tailwind in the first-half of the year, it believes that it should be a headwind for the remainder of the year given high valuations. 

Overall, it sees a more challenging environment for high-yield credit and recommends sticking to the short-end of the curve to minimize duration and default risk.

Finsum: In a strategy piece on high-yield credit, UBS digs into its strong performance in the first-half of the year, and why it expects a more challenging second-half. 

Ask yourself: how do you think you’d respond to any investment product quoting a yield of at least 10%?, stated thestreet.com.

Off the top of your head, umm…okay, sure? Well, okay, that might be because, to capture a nosebleed level like that, usually, the fund’s rife with risk or the yield’s not sustainable.

Reasonably speaking, the highest yield you can reach on the fixed income side stems from junk bonds. Currently, the iShares High Yield Corporate Bond ETF chimes at approximately 8%.

Meantime, looking north, for this cycle, Canadian interest rate are looking at their high. What’s more, given the reopening boom and rate hike cycle are, by in large, in the rearview mirror, the time’s optimal to peak again at fixed income allocations, according to privatewealth-insights.bmo.com.

When inflation’s less than 3%, the top 15 industries are nearly all cyclical. Not long ago, Canada’s Consumer Price Index receded below that level. In the aftermath of a Fed pause, multiple sectors and, as a whole, the market, tends to perform well six and 12 months afterwards.

Save the risky business for the movies.

With little risk linked to it, active fixed income is one reason investors are attracted to it, according to assetnvesting.net.

What’s the scoop here? Well, it guarantees the capital of investors and reduces --  and not just a little – the insecurity that it can dispense in the event that if, for one thing, an equity investment’s opted for.

It doesn’t stop there. Additionally, the fixed income shells out a return. While it might not be robust when weighed against other investments, it boasts a reputation ahead of time. That matters since, because of it, investors are positioned to previously know the results it will secure. For conservative investors, it’s what they opt for first.

And talk about versatility. Tactical responses to a cocktail of market climates and shifts in regimes are facilitated by an active approach, according to troweprice.com. On top of that, it dishes out the flexibility to leverage pricing anomalies and dislocations that a volatile climate might generate. Additionally, curve positioning could be a good idea to mull.

Category: Eq: Market, 

Keywords: active, investors... etc.

In a piece for AdvisorEdge, James Langton discusses how banks are tightening their lending standards which could present an opportunity for alternative investment managers. According to a report by Fitch Ratings, there is a surge in interest for private debt from borrowers. In North America, private credit funds’ assets under management increased from $242.7 billion in 2010 to over $1 billion at the start of the year. 

And, this trend should only accelerate in the coming years especially as regional banks are a key source of funding, and many are struggling with an inverted yield curve. The crisis in regional banks earlier this year underscored their perilous position. Thus, it’s not surprising to see a flurry of new private credit funds. In the second quarter, 34 new funds were launched, raising $71.2 billion, more than double what was raised in the first quarter. 

Private credit is more insulated from rising rates due to its reliance on floating rate-loans. Additionally, default rates have remained at historically low levels at 1.6% in Q2 and 2.2% in Q1, indicating that the overall economy remains resilient and rewarding investors in these funds. 

Finsum: Funding from banks is increasingly difficult to access given tighter credit standards and challenges for regional banks. This is creating an opportunity for alternative investment managers as private credit funds step into the void.

The first-half of the year saw the energy sector underperform due to various headwinds such as the crisis in regional banks, concerns of a recession, high rates, tight monetary policy, stubborn inflation, etc. The second-half of the year has seen energy outperform as economic data continues to come stronger than expected and inflation has moderated, leading to more confidence that a soft landing outcome is likely.

For instance, crude oil started the year at around $80 per barrel but spent most of the first-half, trading between $60 and $70. In the second-half of the year, oil has traded between $70 and $80 for the most part. 

In terms of the outlook for crude oil for the rest of the year, the major bullish catalysts are reduced output due to OPEC+ cuts while demand should remain resilient especially if a recession is avoided. However, there is a bearish catalyst on the horizon due to increasing concerns that China could already be in a recession. 

Recent data coming out of the country has been quite poor. This has been underscored by the 8.5% decline in property investments and defaults from some high-profile developers. Retail sales data also missed badly at 2.5% growth vs expectations of 5.3%. Another concerning datapoint is the 14.5% decline in the country’s exports. These trends could undermine the nascent rally in crude oil given that it’s a major source of demand.

Finsum: Crude oil prices have enjoyed a nice rally in the second-half of the year, however a weakening Chinese economy could result in the rally fizzling out.