08/26/2024 | News release | Distributed by Public on 08/26/2024 12:18
With a few weeks to go before the Fed likely makes its first interest rate cut of the cycle, there's still time for investors to add duration and credit exposure to their portfolios if they haven't already done so.
Treasury yields at the shorter end of the curve are poised to decline in response to rate cuts, while longer-maturity yields should come down given a modest slowdown in economic growth - a favorable backdrop for price appreciation in bonds. Even as the economy decelerates, consumer balance sheets remain solid, and business investment durable. We believe this combination could help keep corporate default rates low.
Additionally, the U.S. presidential election is just over two months away. Over the past seven election cycles and across credit sectors, average one-year returns post-election have been strong (Figure 2).
Fixed income allocations that get our vote. In the taxable space, we see attractive opportunities in both investment grade and below-investment grade categories. Preferred securities are a worthy candidate among investment grade sectors. Preferreds are underpinned by fundamental strength in U.S. banks (the largest issuers of these securities), all of which passed the Fed's 2024 stress tests in June. We especially favor $1000 par preferreds, which currently offer nearly two units of yield per unit of duration. As for below-investment grade sectors, high yield corporate bonds are yielding over 7%, particularly compelling in light of how much credit quality has improved in recent years. Additionally, interest coverage ratios (a measure of a company's ability to service its debt) remain healthy for high yield issuers, and only a small portion of the debt held by the sector will be maturing in the next few years.
Municipal bond exposures that lead in our polls. The municipal yield curve is positively sloped, rewarding investors for extending duration. High yield municipal bonds, which feature longer durations, currently provide a taxable-equivalent yield close to 9%. And about 75% of the Bloomberg High Yield Municipal Bond Index is made up of BB rated (higher-quality) issues. In fact, broad high yield munis recently marked their second-longest period since 1987 without a Chapter 9 bankruptcy petition. Against this sound credit backdrop, we expect defaults to remain low, rare and idiosyncratic.
Municipals are also benefiting from robust investor demand. Year-to-date, flows into the asset class have been significant, with long-term maturities (10+ years) garnering the most interest. And though high yield muni spreads have tightened, this has been driven by steady demand. We expect both the demand and spread tightening trends to continue, as investors seek to lock in attractive yields ahead of interest rates shifting downward across maturities.
Nuveen's Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.
Regular meetings of the GIC lead to published outlooks that offer: