The rate and fixed income picture has shaken up quite a bit since the start of the year. The current bond market is a far cry from the desperate search for yield of a few years ago. Now, investors have options, but with options come questions. Jason Greenblath, vice president, senior portfolio manager, and director of corporate credit research at American Century Investments recently spoke with VettaFi to discuss answers, and the firm’s current approach to assessing risk and adjusting fixed income portfolios.
- Geopolitical volatility has had an impact on the bond outlook, but how much?
- The top and bottom ends of the curve are offering opportunities, according to Greenblath.
- The active ETF landscape has strategies that can get more out of those potential mispricings.
So what exactly changed during a complicated April for fixed income? In Greenblath’s view, the biggest story was the sheer amount of data center debt coming to the market. He identified about $75 billion in new issuance of data center-related supply. He also noted that Meta (META) was responsible for $25 billion of that amount on the last day of the month.
Other than the onslaught of data center debt supply — which includes several high-yield opportunities — the ongoing Middle East crisis, particularly regarding the Strait of Hormuz, acts as a second major factor. According to Greenblath, firms and consumers are currently withstanding this pressure.
“I think what we’ve seen in the month of April is resilience so far and fundamentals, both corporate fundamentals and consumer,” Greenblath said. “And despite the oil shock, I think fundamentals remain intact for now.”
For Greenblath, investors can find mispriced risk at the bottom and top of the risk spectrum. The very low end of the curve, triple Cs, he said, don’t yet fully reflect an economic slowdown. That lower cohort of borrowers, he noted, are most at risk of needing to restructure balance sheets due to interest rates. On the other hand, those at the top end of the curve, the supply is up, cheapening them and making spreads more attractive.
Sector wise, airlines have faced a struggle due to the rising oil prices, while business development companies appear appealing due to their shorter debt maturities. However, the biggest downside risk remains looming employment-related dislocations.
“We’re watching for big layoffs,” Greenblath said. “Certainly some of the big Silicon Valley technology companies have announced tens of thousands of job losses or restructuring. So we’re keeping a very close eye on that. I think that’s probably the biggest risk.”
American Century Investments is actively seeking mispricings in the market amid those shifts, Greenblath explained. Risk was increased in March as valuations became more attractive, particularly in investment grade, but was tamped down in April as prices rose and spreads tightened.
“We’re buying very short, dated one year, two year business development company debt, specifically very selective on the borrowers, and then the same on the airlines,” he said. “There’s several here in North America, there’s one or two in Latin America and emerging markets that we think are really attractive.”
See more: Rising Volatility Reveals Opportunities in Corporate Bonds
American Century Investments offers a variety of fixed income strategies. The firm’s (KORP ), for example, charges a 29 basis point fee to actively invest in corporate bonds that meet the firm’s standards. It has added more than a quarter billion in net inflows over the last 12 months, according to ETF Database data. Together, those factors speak to a shifting bond outlook in which the right risk assets can really help to boost portfolios.
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