A de-escalation of trade tensions between the US and China has seen the markets embrace risk assets again, providing “renewed optimism” in the credit market, according to Pinebridge Investments.
Steven Oh, global head of credit and fixed income, said of the reversal in investor sentiment that while “clarity on outcomes remains limited”, a pullback from the worst-case scenarios “has imparted greater confidence that trade policies will ultimately settle at levels that avoid material negative economic and market impacts”.
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He pointed to expectations that the parts of the Trump administration’s agenda relating to taxes and deregulation will be “stimulative”.
In his latest investment views, Oh said the renewed optimism among markets had seen valuations retrace “much of their widening”, with investment grade (IG) credits now in the +mid-80s range and high yield (HY) at +300 levels.
As a result of credit spreads now trading through Pinebridge’s “fair value range”, Oh said that its conviction score had moved toward a “more defensive posture and are reverting to favoring IG over HY”.
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“While fixed-rate debt again possesses a defensive element, we favor floating spreads. Emerging markets (EM) are providing a diversification element as much as a pickup in incremental spread,” said Oh.
Hani Redha, portfolio manager, head of strategy and research for global multi-asset at Pinebridge, agreed that while US policy uncertainty remains elevated, “it has probably peaked, as evidenced by various policy uncertainty indexes”.
He cited as evidence that the US president is “demonstrably constrained” by the bond market and the courts.
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