Seeking return when spreads are tight Seeking return when spreads are tight http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\webcasts\hiker-cave-overlooking-landscape-small.jpg September 7 2021 September 9 2021

Seeking return when spreads are tight

Several factors put upward pressure on yields.

Published September 9 2021
My Content
Video Transcript
00:04
My name is Chris Wu. I'm a Portfolio Manager at Federated Hermes.
00:08
In which bond market sectors do you see opportunities?
00:11
As the economy recovers from the pandemic, I expect above-trend economic growth, continued Fed policy support, and bond yields to go higher. This would suggest most spread sectors, high yield and emerging market bonds, for example, will continue to outperform treasuries. But the credit spreads, the yield gap between credits and treasury bonds, are tight. That limits the return potential. So, I see opportunities in credit sectors with higher yield and lower interest rate risk. High yield, bank loans, and trade finance are attractive because their yields are high and their durations are short. In the higher quality space, I still like asset-backed securities. Their fundamentals are strong and consumer balance sheets are healthy. But again, because of tighter spreads, we are much more selective. Overall, I still expect the reflation trades to bounce back, and the trend of reaching for yield to continue at least in the near term.
01:33
What factors are influencing the bond market the most?
01:37
The main factors that impact the bond market are credit risk and interest rate risk. Additionally, liquidity risk needs to be carefully managed as well. But my main worry at this moment is the interest rate risk. Treasury yields dropped significantly in the last few months, especially at the long end of the curve. That frankly was somewhat puzzling. With the U.S. economy growing fast, job creation strong, and the Fed likely to announce tapering by year end, interest rates should be higher. Inflation is running hot too, and is likely to be more persistent because of supply bottlenecks, that should put upward pressure on yields as well.
02:32
Disclosure: Views are as of Aug. 13, 2021 and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks, and may be more volatile than investment grade securities. International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging markets securities can be significantly more volatile than the prices of securities in developed countries and currency risk and political risks are accentuated in emerging markets. Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices. Duration is a measure of a securities price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations. Past performance is no guarantee of future results. Federated Investment Management Company 21-40419 (9/21)
Tags Markets/Economy . Interest Rates .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risks and may be more volatile than investment-grade securities.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Duration is a measure of a security's price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.

Past performance is no guarantee of future results.

Federated Investment Management Company