When Spreads Are Tight, Opt for Multi-Sector Credit
Jun 5, 2025
Actively investing across multi-sector fixed income can help mitigate volatility during macro uncertainty, according to Michel Kageshima, portfolio strategist at PGIM Fixed Income.
When spreads are tight and macroeconomic uncertainty remains high, actively investing across multi-sector credit can help mitigate portfolio volatility.
This is according to Michel Kageshima, portfolio strategist at PGIM Fixed Income, who told FSA that even though spreads have widened slightly, valuations in credit remain rich.
“This reinforces the need for selective exposure and knowing when to pull the right levers,” he said. “Active multi-sector investing allows managers to dynamically allocate capital where the best risk-adjusted opportunities lie—across geographies, sectors, maturities and credit qualities.”
“Very deep bottom-up capacities also mean we can add real alpha via credit selection—essential when spreads are tight and idiosyncratic risk is rising.”
Rather than being tied to a single beta, Kageshima said multi-sector fixed income managers can lean into areas where they see resilient fundamentals and attractive valuations, while avoiding areas with structural headwinds.
He said: “It’s about exploiting dislocations, not hugging benchmarks. The goal is to build in carry, protect capital, and stay tactical through volatility, actively managing credit exposure in a balanced way to deliver consistent income.”
Flexibility during macroeconomic uncertainty
When the macroeconomic environment is uncertain, Kageshima also argued that the flexibility to invest across sectors “matters more than ever”.
“High levels of starting yields in fixed income mean there is no need to go down in quality to find the best risk/reward opportunities,” he said.
“High-quality securitised credit continues to offer attractive risk-return profiles. Shorter-dated investment grade and portions of high yield also screen well.”
He said that combining that with a well-diversified carry cushion from higher-yielding credit sectors can act as a buffer against any spread widening.
He added: “Whilst we manage portfolio-level credit risk to a cautious level, we can monitor and identify underlying relative value dislocations that are created by the credit cycle and laid bare by market volatility, taking advantage of opportunistic positions with dry powder.”
Managing interest rate risk
Given the 2022 bond sell off and ensuing the interest rate volatility investors have endured since, many fixed income investors have grown cautious on being exposed to interest rate risks.
Kageshima said he expects directional duration trades will continue to have “unattractive risk-adjusted payouts”.
“Longer-term, we are in a higher for longer environment where expansive fiscal policies (government spending for defense, industrial policy, climate change, infrastructure, reorganization of global supply chains) will pressure rates and term premia,” he said.
Kageshima said investors can still take advantage of the long-term attractiveness of fixed income as an asset class by maintaining a neutral or low duration profile, which can help cushion against further rate-driven volatility.
He added that managers can actively position for the credit cycle and the mean reverting nature of credit spreads through the use of bottom-up credit research and active management of credit beta.
This article was written by Fund Selector Asia
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