Capital IdeasTM

Investment insights from Capital Group

Fixed Income
Outlook for credit sectors
Damien McCann
Fixed Income Portfolio Manager

Portfolio manager Damien McCann explains where he sees value across four primary credit sectors. 


Video transcript

This transcript is intended to be presented only when accompanied by the video that includes additional important information and disclosures.

Damien McCann

Hi, I'm Damien McCann. I am the Principal Investment Officer for our multi-sector income strategy.

In our multi-sector income strategy, we invest across four primary credit sectors: the US high-yield market, the US investment-grade corporate market, emerging market debt, dollar denominated, and securitized credit. I'm being asked by clients and investors where I'm seeing value across these four primary credit sectors.

As we look at credit spreads, generally we don't think we're being particularly well compensated. This leads me in a multi-sector context to prefer the higher quality sectors. So that would be investment-grade corporates and securitized credit where we have overweights to both of those sectors. And then we're underweight the higher yielding but lower quality sectors. So let me now speak a little bit about each of those sectors. We are seeing more value in investment-grade corporates. Spreads are wider than they were a year ago. And while on a longer term historic basis, spreads are not especially wide today, we do think that there would be significantly less spread widening in investment-grade corporates in the event of a big slowdown in growth or a mild recession compared to other credit sectors.

We're also seeing very strong demand for all new issues in investment-grade corporates from a wide variety of investors who are coming into the market in size as they attempt to lock in these much higher yields for a longer period of time. And investment-grade corporates, we typically have access to companies borrowing either on a five year term, a 10-year term, 30-year term, or sometimes even 40 year.

In securitized credit, we're finding value in subprime auto, and we're focused on the higher rated tranches within these structures where we think we're getting well paid in the context of a consumer that is very resilient and fully employed, as well as used car prices, which are quite elevated compared to history.

In the high-yield market, we're also investing pretty conservatively at the moment, preferring to focus on companies that have resilient earnings and free cash flow.

Even in a weaker economic environment, rates are significantly higher than they were just one year ago, and any company, irrespective of credit rating will face significantly higher borrowing costs as they come to market. And so it's important as our analysts look across the landscape, that we identify companies that can accommodate significantly higher coupons on incremental debt issues without causing any stress to the balance sheet. In emerging market debt, we see more value in the higher yielding, lower rated issuers, sovereign issuers, than we do in the higher quality issuers. And that's primarily just because of a significant difference in valuation where spreads are just very wide across high-yield rated EM. And our analysts are finding value. In particular, we're focused on Latin American issuers where central banks in many Latin American countries were even more proactive than the US Fed in hiking rates to try to get ahead of inflation. And we're seeing more significant improvements in inflation in these emerging markets than we are in developed markets. And we think we're being paid well for this situation.

So as painful as 2022 was, significantly negative total returns for fixed income investors as yields increased from starting very low levels in early '22 increased dramatically over the course of the year, the silver lining is that the yield opportunity is now better for fixed income investors. And so as we look out over the next several years, the probability of a negative total return is actually pretty low because starting yields are now so high. So, we view now as an excellent time for fixed income investors to come back into the market.

Damien McCann is a fixed income portfolio manager at Capital Group. He has 24 years of investment industry experience, all with Capital Group. Earlier in his career at Capital, he was a fixed income investment analyst and covered energy, leisure and lodging, and rails. He holds a bachelor's degree in business administration with an emphasis on finance from California State University, Northridge. He also holds the Chartered Financial Analyst® designation. Damien is based in Los Angeles.

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.