Golden Age for European High Yield?
Learn more about key factors driving spread compression in the EURO high yield market, resulting in potentially strong returns for longer-term investors.
Each quarter, PGIM Fixed Income publishes an outlook describing their views on the economy, as well as their expectations for sectors within fixed income markets. Here’s where they see value (and where they don’t) in the coming quarter.
|Developed Market Rates||Opportunistic||In a generally low volatility rate environment, we continue to focus on opportunities from mispricings, including those driven by central bank expectations and Treasury auctions.|
|Agency MBS||Positive||Positive on production coupon spreads and TBAs vs. intermediate Treasuries. Specified pools outside of the Fed’s purchases also appear attractive. We continue to prefer other sectors vs. MBS given the sector’s potential headwinds.|
|Securitized Credit||Positive||We remain positive on high-quality spreads as near zero rates and aggressive Fed intervention creates and environment for spread tightening. We are wary of mezzanine risk for CLOs and conduit CMBS, but find value in subordinates of select securitized credit assets.|
|IG Corporate Debt||Positive||Positive in light of central bank support and the prospects for an economic recovery. Favor U.S. money center banks as well as select BBB-rated issues, cyclical credits, and fallen angels.|
|Global Leveraged Finance||Constructive||Constructive over the medium and long term. Spreads are at attractive levels versus historic norms and will drive strong returns for investors with longer-term time horizons. Over the near term, the market will likely remain volatile (but relatively range-bound) given fears of a reacceleration of Covid cases and uncertainty around the U.S. elections. We believe actively managed credit selection will be a differentiating factor between managers.|
|Emerging Market Debt||Opportunistic||Emerging market (EM) performance may bounce in Q4, though there may be bumps given the political uncertainties looming in the developed markets. Spreads will benefit from attractive relative valuations, and we favor spreads relative to local rates and FX. We continue to like higher-quality names and select higher-risk credits with additional room to perform. EM local bonds still have scope to do well, but we are focused on our overweight positions. EMFX has momentum if dollar weakness resumes, and positioning remains very selective.|
|Municipal Bonds||Constructive||Despite attractive valuations, our near-term outlook remains cautious based on expectation of elevated supply prior to the U.S. elections, lack of additional federal aid for states and localities, and increased market volatility. We would expect more favorable technicals to support tax-exempts into year end.|
The full PGIM Fixed Income Market Outlook is available for financial professionals.
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