From Anders Persson, Nuveen Global Head of Fixed Income
An excerpt from its recent Global Investment Committee Viewpoints
Despite today’s increased volatility, markets remain efficient overall, with expected outcomes largely priced in — evidenced by tight credit spreads, a crowded artificial intelligence (AI) trade and full equity valuations, among other indicators. This complicates the quest for relative value and durable upside, leaving some investors hard pressed to identify the next asset classes or sectors best suited to take on the role of portfolio diversifier, income generator or return maximiser.
In fixed income, we favour higher-yielding sectors with healthy credit profiles, such as senior loans and preferred securities. And we continue to stand by two favoured asset classes whose recent rebounds are hitting their stride: municipal bonds and private real estate. Lastly, among alternative investments, we like certain areas of private equity and private credit, specifically strategies where rigorous underwriting helps mitigate risk.
Preferred securities should benefit from strong fundamentals and limited new issuance. Senior loans offer attractive yields and value.
Investment positioning
- We remain constructive on global bond markets. Despite tight credit spreads in some areas, yields are attractive, fundamentals strong and investor demand high. As has been the case for some time, we think it makes sense for investors to exercise broad diversification and take advantage of the nimbleness and flexibility offered by active management.
- U.S. Treasuries offer poor relative value. We expect long-term rates to remain range-bound even as short-term rates decline. We advocate maintaining neutral duration and focusing on credit opportunities.
- Investment grade credit faces potential headwinds from tight credit spreads and extended duration. In contrast, areas such as senior loans and CLOs offer interesting opportunities given relatively high yields and sector dislocations. Emerging markets debt, especially corporates, also appears compelling, while high yield fundamentals remain solid with favourable long-term prospects. We are upgrading preferred securities, which offer a compelling combination of attractive yields, solid credit quality and decent liquidity. We remain constructive toward securitized assets on a long-term basis, but recent performance has been very strong, and spreads now offer fair value.
- Municipal bonds rank among our top preferences. Strong fundamentals support improving prices and attractive relative value. The upward-sloping municipal yield curve offers compelling yields for those who are looking to extend duration.
- We are carefully monitoring private credit markets for signs of stress but continue to see opportunities. Recent negative headlines and ongoing isolated credit events underscore the importance of careful selectivity focused on deal structure and strong covenants.
