Credit Where Credit is Due
After widening in the weeks around tariff announcements, credit spreads are now closer to their historical lows—reflecting the relatively benign macroeconomic backdrop. Credit has been remarkably resilient so far this year, more so than equities, and has been an important source of both income and diversification for multi-asset strategies.
Spreads (or valuations) may look expensive, but we believe that it’s more important to focus on yield levels. In fact, yield-to-worst has been a better predictor of return over the next three-to-five years than spread, even in the most challenging bond markets. And today, yields across credit are attractively high. We currently prefer higher-quality issuers, such as BB-rated, over lower-rated bonds to help manage tail risk.
Positioning for a Steeper Yield Curve
We continue to view duration, or sensitivity to changes in interest rates, as an important diversification lever within a multi-asset income strategy. We expect US inflation to peak in the third quarter due to earlier tariff pressures, but with labor and wage trends cooling, the Fed should have room to resume rate cuts by year-end.
In the meantime, interest rates are still trying to find balance between easing policies on one side and rising yields among longer maturities on the other. This had caused a steady steepening of the yield curve. As a result, we think it’s prudent to lean toward short-to-intermediate bond maturities, where the risk-reward trade-off between yields and interest-rate risk is more attractive.
Casting a Wider Net for Equity Opportunities
From our perspective, markets are probably past the worst of the trade war turmoil, and tariff levels will likely settle just above where they began the year. We’re not out of the woods, but with a little more policy clarity than a few months ago, businesses are better able to lay out plans. Labor markets, manufacturing and services output, and corporate earnings have also shown resilience.
We continue to buy into the case for US exceptionalism, believing that the country’s unique qualities still support compelling and diverse investment opportunities versus other countries. But we also see the many benefits of global diversification among stocks and bonds.
Despite their volatile patch in April, global stock markets touched record highs by midyear. Returns have continued to broaden beyond a concentrated handful of US-technology highfliers to companies across sectors, regions (Display, left) and factors, such as growth, value and high-dividend payers (Display, right). This reinforces why we believe a broad mix of equities makes for effective multi-asset income strategies.
