Global Perspectives: Five questions on the minds of fixed income investors

Lara Castleton: Hello, and thank you for joining this episode of Global Perspectives, a Janus Henderson podcast created to share insights from our investment professionals and the implications they have for investors. I’m your host for the day, Lara Castleton.

For over a year, you’ve heard us discussing how the relative spreads across fixed income sectors have been creating different risk-adjusted opportunities for investors. Today, I want to take a different format because I’m joined by John Lloyd, Portfolio Manager and Head of Multi-Sector Credit Strategies at Janus Henderson, and somebody who has been meeting with clients regularly discussing this topic.

So, today, we’re going to go through the top five questions on fixed income sectors that have come up in our client conversations, John’s being more specific to his role as Multi-Sector Credit Strategies Lead, and my team’s is on how to balance fixed income sector exposures in an allocation. John, thanks for chipping in with these questions and for being here today.

John Lloyd: Thanks for having me.

Castleton: Let’s start, then, with just markets in general moving at such a fast pace. In particular, in the credit market, spreads have widened out a little bit at the start of 2025. They’re still tight relative to historical standards. So, in talking with you, the number-one question I think we get from clients is, do you expect this tight credit spread environment to continue, and for how long?

John Lloyd: It’s a good question. Going into the year, our theme was to maximize spread per unit of volatility. We actually didn’t think there was a lot of tightening in the spread market, in any of the spread markets, securitized or corporate spreads. Corporates were obviously tighter than securitized going in, so we favored securitized credit. And I think what we’re seeing is we’re starting to see some widening in the credit markets overall. What’s causing that? A lot of it is fiscal policy and uncertainty around the fiscal situation. And so, you’re starting to see some of the, call it, soft economic data come in a little bit softer, and the credit markets worry a little bit more about that. And we’ve seen the rate market rally as a result.

Castleton: Do you worry, then, as we look forward to the end of the year? Obviously, we’re at a very uncertain time right now. We’re recording this pre-April 2nd, which is obviously a big day for fiscal policy and tariff announcements but, regardless, there’s still some uncertainty around that. So, do you expect credit spreads to continue that widening path, or are there technicals that will maintain the tightening of that market in the IG [investment grade] and high yield space?

Lloyd: The technicals are still pretty strong, especially on the corporate side. I think that will be an offset to some of the potential spread widening, but I think, with the uncertainty around the fiscal policy, and we’ll see what tariffs get announced, and then we also have to wait and see, what are the counter announcements from other countries as they retaliate toward the U.S. as well.

My viewpoint is volatility is probably here to stay for a while, and we’re going to have to let the tariffs and some of the fiscal decisions work their way through to see what happens to the economic data. And if we continue to see weakening economic data, I would expect to see continued spread widening and spread volatility.

The other thing we haven’t talked about is the Fed. It puts the Fed in a little bit of a pickle. Now, I think they’ll focus a little bit more on their employment mandate, but with tariffs, they’re going to be somewhat inflationary. And so, you could be in this, call it, short-term period of stagflation where the PCE [Personal Consumption Expenditures] numbers are coming in hotter than the Fed wants and economic growth data is coming in more slowly. So, is that Fed put going to be immediate? And we’re starting to see some of that in the rate market as rates have rallied, and they’re pricing in more cuts this year than at the beginning of the year.

Castleton: So, credit spreads still tight, which does leave open the door, it sounds like, for that widening throughout the year. Meanwhile, securitized sectors have, for a while, had much wider spreads than their historical averages. So, the second question that you often get is, why are securitized spreads trading wider? And is that something that you see changing in the near future?

Lloyd: I’ll start by saying securitized spreads will be correlated with general risk markets, but they started at a wider level, which is one of the reasons we preferred securitized spreads. A lot of that was just technicals or idiosyncratic reasons within some of the markets, and so you’ve seen a lot of issuance in the securitized market. We’ve seen the opposite on the corporate side; we’ve seen the high yield market shrink over the last three years. Issuance has been pretty anemic, and that’s been a really strong technical in the high yield market. And so that’s … if you want a starting point for why spreads were a little bit wider.

Two other reasons, and I’ve talked about this before, but on the agency mortgage side, we had the largest buyer, the Fed, move out of the market and go from QE [quantitative easing] to QT [quantitative tightening]. We saw some bank failures and banks selling their mortgage books. And mortgages generally don’t like rate volatility either. So, on the securitized side, mortgages have been wider.

And then I think there’s also been a little bit more of a general worry about the consumer in the U.S. and how strong the consumer would remain, which fuels a lot of the securitized markets, especially in the ABS market. We’ve had a differentiated view there, where the consumer has been pretty strong, and so we’ve been very constructive on the ABS [asset-backed securities] market over the last couple of years. The nice part is ABS and CMBS [commercial mortgage-backed securities] and agency mortgage spreads are starting from wider levels, so I think you’ll see less widening. And we’ve actually seen that in this initial backup. We’ve seen high yield spreads sell off, call it, 90 basis points, and securitized spreads have done a lot better than that.

Castleton: Even securitized spreads are correlated to risk markets, and if we do start to see, as you mentioned, softer economic data coming in, you would likely think they might widen out as well. But you just, maybe, answered that. They already started a little lighter, so they’re a bit more insulated.

Lloyd: Yes. We’ve seen them outperform the high yield market and IG markets at this point, and I would expect that to continue going forward if we see more volatility. And mortgages have outperformed as well. The nice thing about mortgages is there’s no real credit risk there, so they almost provide a counterbalance, when they were starting at the wider end, to IG corporate spreads.

Castleton: Great. That’s something that we’ve talked about regularly, again, with clients over the past year, just this dynamic of securitized maybe offering some better risk-adjusted yield and spread than credit markets. That will not always be the case. So, the third question that we often get is, how have your strategies been positioned? I think we kind of know, but maybe reiterating that. And then what, in your outlook, would cause that to shift going forward?

Lloyd: I think it’s just the relative value shifting between corporates and securitized. We started the year off with corporate spreads at almost all-time tights, first percentile. They’ve backed up. They’re in, call it, the 20th percentile now. And as we see those spreads backup more than securitized It just becomes a little more attractive as those spreads backup and backup more than the securitized side.

Castleton: And this is something that’s happening quickly, right?

Lloyd: Yes.

Castleton: It’s something you’re monitoring almost on a daily basis?

Lloyd: Correct. You take advantage of what the market gives you when you’re seeing these types of moves. I think the volatility gives funds tremendous opportunity to asset allocate and move those allocations around as you start seeing value in different markets.

Castleton: Which is extremely attractive for the clients that I’m working with. If we transition, in our consultations, probably the fourth and fifth questions get down to implementation of these ideas. It can be very attractive to investors and clients that we’re talking to about securitized spreads over corporate, but the implementation is hard for them to do as quickly as you’re able to.

So, the fourth question that we typically get is just generally the role of a core plus in a portfolio, particularly for clients who have shied away from duration for a while. From my perspective, when we talk to clients, one, I think it’s hard to move away from money markets. I understand that. But it is clearly starting to happen. Clients are starting to invest heavier in duration. Our average client that we work with, their portfolio has a duration of about 4.2 years. So, it’s starting to happen. We’ve seen that trickle up a little bit.

From my perspective, in a portfolio angle, core plus can provide that professional sector management to the higher credit quality universe of credit, sovereign and securitized through agency, but it also can provide that ballast of equity volatility, which we saw at the beginning of the year. When you have more duration in higher credit quality fixed income sectors, you can have the greater potential for total return. So, that’s what we see as a role of core plus. Would you add anything to that? And then how does Janus Henderson approach the core plus universe?

Lloyd: I think from a broader portfolio construction viewpoint, the nice thing about core plus, and we were talking about this going into the year, is we expected sometime this year – I’ll actually be honest, I thought it would be more second half than first half – is that we would see negative correlations between rates and risk markets again. And I think we’ve seen that with some of the fiscal policy uncertainty that we’re seeing today and the equity sell-off.

So, that’s a real advantage. It’s going to carry six-plus years of duration, generally speaking, and be in high-quality credit to get some added carry while you own that duration. And so those are the advantages today, is you’re not looking at a ‘22 period where the Fed is going to be hiking and you’ve got to get out of the way of duration. Now is the time where duration can actually be pretty beneficial in portfolio construction, more broadly speaking.

Castleton: And the reason that we, as active managers, can add value to our end clients is because, again, that duration isn’t created all equal, right? You do want that balance of where the risk-adjusted spreads are today. And that’s what we can do in the space is be extremely flexible.

Lloyd: Correct. And, we still have an asset allocation process, where we can be overweight securitized or agency mortgages versus corporate credit. And where are we getting the best spread? From what sectors as well?

Castleton: And then that gets us to the final question that we get. If I start from my side, the question is, generally, what can a multi-sector strategy offer above a core plus strategy in a portfolio? And my answer to that is core plus is constrained to the amount of allocation it can go to the more nuanced below-investment grade sectors. So, one, you’re opening yourself up to a greater opportunity set, to more high yield or more of these agency CMBS-type or below-investment grade securitized sectors. So, much wider opportunity set to begin with.

But then there’s also that potential for, in that area of the portfolio, more yield generation with less duration sensitivity, all the while not having as much of a high correlation to equities that you would get from only allocating to something like a high yield, a preferred, or a convert-type strategy. So, it’s that flexibility for more yield generation and a greater, wider opportunity set of sectors. Would you agree? Anything to add on that? And then maybe, again, how does Janus Henderson approach the multi-sector credit space?

Lloyd: I think that’s a perfect description of where multi-sector fits and, talking to clients, I think it’s better than any single-asset fund because you’re getting a free diversification benefit across all the asset classes, and a fair amount of alpha by asset allocating to sectors over time that are cheap.

And then the other area I think we see clients taking some of the core plus and moving that out to get a little bit more yield as well, while still keeping some core plus, because it’s going to be obviously much less equity sensitive.

And then I think, to go to the second question that you asked, how are we differentiated? I really think, at Janus Henderson, one, we think of it as a best ideas strategy across all the sectors. And so, in each sector, we’re going to basically run our analysts’ top ideas, and that’s one of the biggest drivers of alpha.

And then the other one we talked about, which is asset allocation. And on a monthly basis, we’re looking at, what’s our asset allocation mix? What sectors are we overweight and why? And how do we generate alpha from that as well?

Castleton: Yes. And that’s the key with our clients that we’re working with and discussing the flexibility of sectors, is there’s obviously a wide opportunity set of places to go in the intermediate core plus or the multi-sector category in general. They’re entrusting you and others to make these decisions. So, that expertise, not only just in understanding the sovereign treasury market or the credit market, but understanding that third securitized bucket, goes very far in both of those categories for that dynamic flexibility.

Lloyd: Yes. And one thing that’s nice, in the category there is wide latitude for the manager. Seth, John, and I basically designed the strategy 11 years ago. It’s the same PMs on the strategy over 11 years, and we have an 11-year track record of how we manage through every cycle. So, you can see we’re pretty consistent through the cycle, how we manage. We’re not taking huge duration bets, one-off duration bets here or there, or massive sector bets. It’s a pretty consistent process that has an 11-year track record in the category.

Castleton: Awesome. Well, thank you for being here today. There is a very clear dynamic of where spreads are in the market, where they’ve been over the past five years, but things are changing very quickly. I think it’s great that investors can have an opportunity to go with someone like us or someone in these spaces to manage these sector changes for them on the fly.

And thank you all for listening. We hope you found the conversation useful. For other insights from Janus Henderson, you can download other episodes of Global Perspectives wherever you get your podcasts or visit janushenderson.com. I’ve been your host for the day, Lara Castleton. Thanks. See you next time.

Alpha compares risk-adjusted performance relative to an index. Positive alpha means outperformance on a risk-adjusted basis.

Basis point (bp) equals 1/100 of a percentage point. 1 bp = 0.01%, 100 bps = 1%.

Carry is the excess income earned from holding a higher yielding security relative to another.

Correlation measures the degree to which two variables move in relation to each other. A value of 1.0 implies movement in parallel, -1.0 implies movement in opposite directions, and 0.0 implies no relationship.

Credit Spread is the difference in yield between securities with similar maturity but different credit quality. Widening spreads generally indicate deteriorating creditworthiness of corporate borrowers, and narrowing indicate improving.

Duration measures a bond price’s sensitivity to changes in interest rates. The longer a bond’s duration, the higher its sensitivity to changes in interest rates and vice versa.

Monetary Policy refers to the policies of a central bank, aimed at influencing the level of inflation and growth in an economy. It includes controlling interest rates and the supply of money.

Monetary tightening refers to central bank activity aimed at curbing inflation and slowing down growth in the economy by raising interest rates and reducing the supply of money.

Quantitative Easing (QE) is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market.

Stagflation is an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation.

Volatility measures risk using the dispersion of returns for a given investment.

A yield curve plots the yields (interest rate) of bonds with equal credit quality but differing maturity dates. Typically bonds with longer maturities have higher yields.