Blog

Benefiting From Flexibility: Opportunities in Multi‑Sector Credit

In today’s environment, as traditional credit market betas become less attractive, investors should consider tactical allocations to non-core sectors such as bank loans and higher-quality securitized credit.

As many traditional credit sectors begin to approach full valuations, credit investors may want to look in new directions for attractive returns with manageable downside risk. In diversified credit portfolios today, de-risking and building liquidity are important, but we also see attractive relative value opportunities in a couple of (sometimes overlooked) sectors.

  • High quality bank loans: While spreads have tightened in absolute terms across credit markets, many high quality bank loans currently offer a similar spread to high yield bonds, but with lower volatility. Compared with high yield bonds (a frequent allocation in a diversified credit portfolio), bank loans sit higher in a company’s capital structure and offer floating-rate coupons as well as structural protections. In a large capital structure, where bank loans are senior secured, recovery rates in the event of a bankruptcy are usually materially higher than for high yield bonds – a feature that historically has contributed to lower volatility for bank loans relative to high yield bonds. With prices wrapped around par, bank loans now offer limited price appreciation as they are generally callable without penalty. However, bank loans may provide diversification in a rising rate environment and attractive yield for broader credit portfolios. Based on current spread levels, BB rated bank loans look attractive versus high yield bonds with the same rating, and in many cases offer a wider spread (see chart).

    Bank loans offer higher spreads over Treasuries than comparably rated high yield bonds
  • Senior securitized credit: Non-agency residential mortgage-backed securities (RMBS) remain one of PIMCO’s highest conviction trades within global fixed income, as these instruments offer a relatively stable yield profile across a variety of housing market scenarios and a way for investors to diversify their existing corporate credit risk. In our base case scenario, non-agencies offer high-yield-like return potential with less exposure to downside risk, and they may also benefit from higher inflation as the collateral appreciates. In addition to non-agency MBS, senior commercial MBS (CMBS) and collateralized loan obligations (CLOs) represent high quality, defensive assets that historically have traded at wider spreads than investment grade corporates due to their lower liquidity and higher structural complexity.

It’s important to remember that across all credit sectors – investment grade, high yield, MBS, municipals, leveraged loans – rigorous bottom-up credit research can help unearth attractive risk/reward opportunities.

Key takeaways

In today’s environment, as traditional credit market betas become less attractive, investors should consider tactical allocations to non-core sectors such as bank loans and higher-quality securitized credit. These instruments can allow investors to target attractive income levels while maintaining a diversified, resilient and relatively high quality portfolio.

For more on multi-sector credit investing, please read our Q&A, “Seeking Opportunities Across the Credit Spectrum Amid Rallying Markets.

READ HERE
The Author

Eve Tournier

Head of European Credit Portfolio Management

Sonali Pier

Portfolio Manager, Multi-Sector Credit

Related

Disclosures

London
PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

Dublin
PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
Limited
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

Munich
PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

Milan
PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

Zurich
PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. BR022803) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2) . The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligation. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate and credit risk. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

XDismiss Next Article
PIMCO