Strategic Insights for Fixed-Income Investing in 2023
As the investment landscape evolves, Janus Henderson is emphasizing the importance of targeting fixed-income sectors that offer more appealing valuations. John Lloyd, a leading figure in the firm’s multi-sector credit strategies, suggests widening the investment lens beyond traditional assets like investment-grade credit, U.S. Treasuries, and the Bloomberg U.S. Aggregate Bond Index.
Current Landscape of Fixed-Income Investments
Despite tight spreads across many fixed-income sectors, overall yields remain attractive. “Yields are still compelling overall, but spreads are very tight across many sectors,” remarked Lloyd. Spreads, which indicate the difference in yield between Treasurys and similar maturity fixed-income assets, remain a crucial metric for investors assessing value.
Performance of Alternative Sectors
Janus Henderson identified specific outperformers in the fixed income market for the past year, notably securitized credit and bank loans. Lloyd pointed out that even with strong annual performance, yields remain favorable when compared to historical yields and the current inflation expectations alongside the forward earnings yield of the S&P 500. He emphasized, “Over a year period, even if you do hit rough spots, it’s much harder to get a negative return with those starting yields.”
Focus on CLOs and ABS
While discussing investment strategies, Lloyd advocates for exploring collateralized loan obligations (CLOs) and asset-backed securities (ABS) as alternatives to conventional investment-grade corporate bonds. CLOs consist of pooled floating-rate loans to various businesses. According to Lloyd, higher-rated securities within CLOs—like those rated AAA, AA, and A—offer attractive spreads, typically around 120 basis points on new issues, outpacing the returns from investment-grade credit.
Portfolio Allocation Insights
As of January 31, the Janus Henderson Multi-Sector Income Fund (JMUIX), which aims to achieve high income with reduced volatility compared to high-yield strategies, includes approximately 13% of its allocation in CLOs. Additionally, the firm offers the Janus Henderson AAA CLO ETF (JAAA), which features a 30-day SEC yield of 5.37% and an expense ratio of 0.2%.
Investing in Asset-Backed Securities
Lloyd’s investment philosophy also encompasses a diverse allocation across the ABS market. He has opted not to focus on sectors like student loans and solar but notes that the overall health of consumers remains strong and that underwriting standards within this space are stringent. Furthermore, ABS tend to exhibit shorter durations than investment-grade credit, providing enhanced protection in challenging economic conditions. The Multi-Sector Income Fund allocates around 15% to these assets.
Comparing Loans with High-Yield Bonds
According to Lloyd, bank loans present an attractive investment compared to high-yield bonds. Investors currently benefit from wider spreads in loans for the same credit ratings. Although there is a trade-off concerning convexity—the relationship between bond prices and yields—Lloyd affirms that the current loan market conditions, with a significant portion of loans trading above par, make it a favorable choice.
Exploring Agency Mortgage-Backed Securities
Investors seeking alternatives to Treasuries might consider agency mortgage-backed securities (MBS), which are also government-backed. Lloyd noted that the agency MBS market has experienced a shift as the Federal Reserve reduced its holdings and banks withdrew from involvement. He pointed out the attractive yields available in this market compared to corporate bonds, stating, “You’re picking up some really good carry versus corporates that we historically haven’t had in the mortgage market.” With the tightening environment of spread in the agency market, these securities provide significant diversification benefits for multi-sector income portfolios.
Conclusion
For investors navigating the complexities of fixed-income investments in 2023, a strategically diversified approach—focusing on asset categories such as CLOs, ABS, and agency MBS—could optimize both yield and volatility. As Lloyd suggests, examining sectors outside traditional categories may help investors capitalize on favorable market conditions.
