American Century’s Greenblath Talks Spring Corporate Bond Shifts

It’s no secret that investors are on the lookout for opportunities in their fixed income portfolios. This is especially true in today’s shifting landscape. Equities are hot, perhaps too hot, and many investors want strong performances out of their bonds in order to keep up. American Century Investments VP, Senior Portfolio Manager, and Director of Corporate Credit Research, Jason Greenblath, discussed the corporate bond landscape in a recent interview with VettaFi.

Key Takeaways:

• Corporate bonds continue to play an important role in the current fixed income opportunity set.
• May saw market shifts with the longer end of the yield curve significantly outperforming shorter end.
• American Century Investments leader Jason Greenblath shared further insight with VettaFi.

Where April saw both ends of the corporate curve appeal, the longer side of the curve came out ahead in May, according to Greenblath, The longer end of the curve outperformed, he said, and it’s generally associated with high quality. The market also found that opportunity amid significant demand for duration and high- quality credit, he added.

“One of the areas where we’ve found currently and historically one of the bigger dislocated parts of the corporate market is high quality, single A, AA-rated 30 bonds,” Greenblath said. 

Meanwhile, on the other end of the spectrum, high-yield, lower-quality corporate bonds underperformed. 

“As you move further down in the spectrum from BBs to single Bs to triple C…lower credit quality underperformed dramatically,” he noted. “So I think it’s also a function of the markets sniffing out the winners and losers in this higher rate environment because higher rates will put more strain on lower credit quality, lower cash flow borrowers.”

Corporate Bond Strategy

Greenblath explained how this also leads to continued mispricing in the higher-quality landscape, with continued appeal among airlines, business development companies (BDCs), and many of the same names that appealed in April. Those firms are appealing amid some continued downside risk in the price of oil, which, he noted, is becoming a more serious risk with a continued lack of a Middle East peace deal.

“Meanwhile, we’re touching tights of the year in credit spreads and investment grade in high yield,” he added. “The market’s looking past higher for longer oil prices, which has an impact on inflation and has an impact on interest rates.” 

Nonetheless, Greenblath emphasized the importance of remaining disciplined with a focus on higher quality. In an effort to avoid “rich beta,” in his words, the process involves selling bonds when they hit fair value or their spread target, preferring instead to have bonds with potential upside.

See more: American Century’s Greenblath on Bond Outlook

“This is what I’ve been talking about with our clients this week. What are you doing in today’s market?” he said. “Market index level spreads are at generational tights. We want to sell that. What we want left over is really the good bonds, the bonds that we think have some sort of catalyst, some sort of reason to go tighter and spread to go up in dollar price.”

“So we only want bonds that have some sort of positive optionality,” added Greenblath. “Everything else is expensive in our minds.”

To benefit from this research, investors can get exposure to the corporate bond space via the American Century Diversified Corporate Bond ETF (KORP). The strategy charges a 29 basis point fee and has returned 5.5% over the last 12 months, as per ETF Database data.

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