Reviving European Securitisation
PGIM Fixed Income explores the European securitised credit market.
After more than a year on pause, and after much anticipation, the Federal Reserve lowered interest rates in September, beginning what is expected to be a period of easing monetary conditions. Treasury yields have trended lower and credit spreads have remained tight in response. Although the Fed anticipates two 25 bps cuts through the remainder of the year and another 100 bps of cuts in 2025, that would still leave the policy rate above the Fed’s terminal rate projection of 2.9%.
The Labour Story Is Driving the U.S. Market
The unemployment rate is rising and traditionally, when the unemployment rate rises, consumption tends to slow. But the U.S. consumer has not been responding in any notable way to the reality that the unemployment rate is up, because they have been working through savings. Should the unemployment rate continue to rise, this may put downward pressure on consumption. We continue to monitor risks associated with a recession, such as the labour market and consumer spending relative to income.
Asset Allocators Can Count On Bonds Again
The allocation to bonds matters in an asset-allocation construct as bonds act as a good shock absorber around equity corrections. In a hiking cycle, cash is where you want to be in the equity downturn. But that is not the case in a rate-cutting environment. There’s a tendency for bonds to deliver solid risk-adjusted returns when they seem cheap relative to equities, as they do today. Although credit markets do not appear cheap from a broad perspective, we see lots of relative value when digging below the surface.
The dispersion in the high yield market is the widest that we’ve seen in several decades. The ability to pick the winners and the losers and to use your credit skills in today’s environment, is as robust as we’ve seen in a very, very long time. Some near-term consolidation is possible. But overall, the favourable outlook for fixed income returns over the intermediate-to-long term remains, thanks to rates and spreads that appear range bound or set to decline from current levels.
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