While certain government bonds and agency mortgage-backed securities continue to offer attractive valuations, Allspring Global Investments has warned that valuations in other parts of the fixed income market are now becoming stretched.
Speaking to InvestorDaily, Allspring Global Investments senior portfolio manager Michael Schueller said the valuations for agency mortgage-backed securities were close to long-term averages, while the spreads for corporate credit were now close to all-time tights.
“We’re currently underweight in high-yield credit, both in the US and in Europe, because valuations are extremely rich,” he said.
“High-yield credit [in these regions] is almost priced for perfection and assigns an almost zero per cent probability of a negative event.”
While the investment manager believes the US high-yield market remains in good shape and that fundamentals remain fairly attractive, “valuations are a sticking point” for greater exposure.
“We think we’re going to have positive growth, the US high-yield market issuer base is in good shape and technicals are very strong as investors have flooded money into the market,” Schueller said.
“[However], when valuations are that stretched, we would rather find exposures elsewhere and wait for a better entry point.”
Schueller said the pricing for high yield credit indicated there was a level of complacency in the market.
"We've seen the sentiment pendulum shift pretty dramatically. Coming into the year, people were very bullish and they were caught off guard when the tariffs were announced on April 2. Most investors weren't positioned for that at all," he said.
"They quickly rushed to the other side of the boat. I think we're now at a point where it's swung back to where it was at the beginning of the year. So I do think that the market is somewhat complacent. Having said that, fundamentals are still pretty attractive."
Schueller said there were still other parts of the fixed income market that offered good value such as agency mortgage-backed securities.
The outlook for agency mortgage-backed securities he said was supported by elevated house prices and a decrease in volatility.
The asset manager said that certain government bonds also offered good value at the moment.
"We recently invested in Australian government bonds, for example, which we find very attractive," he said.
"The relative value they offer from an income perspective to be attractive."
Within corporate credit, Schueller said the asset manager was focused on higher quality within both the US and Europe and shorter duration.
