Corporate credit investors should focus on all-in yield and income opportunities, and a move down in credit quality, given the “more challenging growth-inflation mix ahead”, according to BlackRock analysis.
Amanda Lynam, head of macro credit research, and Dominique Bly, macro credit research strategist, both in the portfolio management group at BlackRock, made the observations following the June Federal Open Market Committee (FOMC) press conference.
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They cited the backdrop of structurally higher interest rates and below-trend growth for suggesting investors focus on all-in yield and income opportunities within corporate credit, “as opposed to the potential total return ‘boost’ from lower rates or tighter spreads”.
“The supportive all-in yield backdrop has acted as a strong technical demand tailwind in both USD IG and HY, contributing to some mean reversion (tightening) in corporate credit spreads even amid market volatility,” said Lynam and Bly.
With an “opportunity cost to being too defensive in this environment”, Lynam and Bly said they favour selectively moving down in quality, to capture additional spread premium.
“A focus on ‘back to basics’ credit analysis will be critical in defining pockets of the market that can navigate this environment, as dispersion within asset classes and sectors is likely to remain elevated,” BlackRock’s Lynam and Bly added.
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The FOMC press conference “signaled a clear wait-and-see approach”, as US Federal Reserve chair Jerome Powell pointed to the summer for “incremental clarity on the path and persistence” of goods inflation.
Lynam and Bly noted that Powell characterized the policy rate as “modestly restrictive” and pushed back against the premise that a near-term rate cut was warranted by conditions in the labor market, which he called “cooling”.
BlackRock’s Lynam and Bly also pointed to the refreshed quarterly Summary of Economic Projections (SEP), with the median projections indicating “a somewhat more challenging growth-inflation mix relative to the March SEP, as well as a higher terminal rate for this cycle”.
On the basis of this, and Powell’s preference to “wait to learn more” before making any adjustments to the Fed’s policy stance, they believe the next rate cut of this cycle – and the first of 2025 – is unlikely to occur before the fourth quarter of this year.
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