Don’t Miss Out: 2024 Credit Market Opportunities

News of three Federal Reserve rate cut forecasts created ripples across asset classes in the first quarter. As the tide turns, investors now find themselves with strong opportunities within the credit market, and it’s creating FOMO.

Flashy equity performers and spot bitcoin ETF popularity drew media attention in Q1. Though equities and bitcoin dominated the majority of the top 10 ETFs by flows year-to-date, intermediate Treasuries and core bond exposure brought in over $9 billion in flows YTD.

A return of yields in the fixed income market drew more and more investors out of protective short duration positions and back into longer duration bonds. There’s also a sense of FOMO on increasingly strong fundamentals. That’s according to Brian P. Kennedy, portfolio manager at Loomis, Sayles & Company, in a Fixed Income Masterclass for Asset TV.

“The underpinnings of the credit markets fundamentally are pretty solid,” he explained. Credit analysts at Loomis Sayles believe bonds are still in an expansion/late-cycle phase.

The return of yields within fixed income after a decade of suppressed performance creates several opportunities for investors. Investment-grade credit is a big beneficiary in the changing rate environment. Dispersions within not just high yield but also investment-grade credit continue to widen, creating investor opportunity. January marked the busiest first month of the year on record for investment-grade issuances, Kennedy reported.

“There does seem to be a little bit of this fear of missing out that we saw late in the fourth quarter,” he noted. This FOMO came largely from investors with larger cash reserves, those underweight in credit, and those with shortened duration exposures.

Active Management Benefits in the 2024 Credit Market

Widening dispersions create a great environment for active managers. “It’s a great bond-picking opportunity,” Kenney explained.

With much in flux in markets, passive exposure to bonds potentially misses windows of investment opportunity. Passive fixed income investing includes exposure to underperforming industries, sectors, or securities. It also doesn’t allow for optimal capture of recently upgraded securities.

High yield bond upgrades to investment-grade bonds were numerous in the last two years. Though Kennedy anticipates a slowing this year, upgrades should still outnumber downgrades. Securitized credit is also a pocket of opportunity this year for investors.

“The other positive we see in the credit markets right now is the discount dollar prices,” he added. “So many bonds are priced below par, given the move-in rates we’ve had.”

Actively managed fixed income strategies could benefit strongly this year, given dispersion and bond convexity. For investors now looking to broaden their bond exposures or lengthen duration, consider actively managed funds for optimal portfolio construction in 2024.

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