Location
Please select your investor type by clicking on a box:
We are unable to market if your country is not listed.
You may only access the public pages of our website.
Key takeaways:
The narrative of immaculate disinflation and a comfortable soft landing has been challenged, as a result of persistently strong inflation data in the US, particularly in services. This is delaying the path of price cuts until later in the year, leading to an upward move in yields across the curve.
Growth data in the UK & Europe remains weak but improving from a low base, and inflation data has responded better, although rising yields in the US have also created upward moves in yields in the UK and Europe.
Unlike in October 2023, this wider move in yields hasn’t caused much pressure in risk assets, where a strong technical of inflows have supported credit spreads, and ultimately investors and the market have balanced out the upward move in yields with better underlying economic data to remain supportive of higher quality risk assets.
Spreads in corporate IG, high quality HY and leveraged loans have remained tight, and equity markets continue to show reasonable positive performance. This overall backdrop has been supportive for investors in Securitized Credit.
The positive sentiment for risk assets coming into the year has meant there has been a significant pick-up in gross supply across US and European ABS, RMBS/MBS and CLO markets but matched for the most parts by investor demand.
This has ultimately led to strong positive returns from a combination of high carry and modest spread compression. The upward move in yields hasn’t been completely pain-free for broader markets, with overleveraged corporates with weak fundamentals, and especially those with nearer-term maturities seeing significant underperformance.
Securitized Credit markets came into the year materially lagging the recovery in spreads we had seen in IG and HY markets. Whilst our market has seen significant issuance since the start of the year, the higher spreads on offer versus developed market corporate credit, together with the shorter interest rate duration nature of most of our asset class, has led to significant positive performance so far.
Most of our funds are close to mid-single positive percentage returns for the year, and a few of them further north of mid-single digit returns. This has been driven by a combination of both high-quality carry and some spread tightening, particularly across the mezzanine portion of the market. Securitized credit is significantly outperforming, versus other areas of fixed income market.
Consumers and corporates have been dealing with higher rates and cost of living pressures for some time. On the consumer side we have witnessed a deterioration in collateral performance and a rise in delinquencies, though that is largely attributable to a cohort of borrowers with less savings and wealth – typically those at the lower end of the income spectrum. This is mirrored in the corporate space where those that have exhibited the weakest performance are ones with challenged fundamentals and stretched capital structures where there is a higher sensitivity to a rise in rates.
Our view through the first quarter has been consistent – i.e. we have assumed that 2024 will show a rise in weakness of lower quartile consumers and corporates and therefore have positioned in the higher quality segment where there is a strong margin of safety and where spreads and yields on offer were already very attractive to begin with. We continue to forecast pressures to remain persistent for the lower quartile of borrowers amongst consumers and corporates, but no systemic rise in stress, and as a result, haven’t significantly changed our positioning over the last few weeks.
The areas most at risk in our markets are those that are most sensitive to higher rates, such as commercial real estate, and those at the very lowest parts of the capital structure where investors are most exposed to front loaded idiosyncratic events and rises in delinquencies. We have been highlighting for quite some time now the issues the CRE sector faces, which are not isolated to defunct offices, but also include excesses built on cheap funding, such as transitional multi-family residential property loans. At this stage, we see market pricing for such assets better reflect the underlying weakness in fundamentals and don’t expect further material deterioration.
There is still a long way to go for the year and uncertainty will likely remain high, whether that be around inflation and rates, geopolitical risk or elections. We believe investors should keep things simple, target better quality investments, with attractive risk-adjusted returns and protection against a significant pick up in defaults – this is where we believe Securitized Credit comes in.
The benefits of an allocation to the sector have been proven over the last few years and our outlook from a fundamental and technical perspective is broadly constructive. With spreads remaining very attractive on account of elevated supply, there is a benefit of investors receiving attractive all-in yields relative to most other parts of the fixed income universe.
Many AAA rated securities in our markets are still offering current yields close to 6.5-7% as an example. Further, when there is high supply, there are opportunities for us to tilt our positioning to those segments where risk-adjusted spreads and yields are most attractive and use the primary market to deploy capital. This has worked well in the first quarter for our funds, and we expect the same for the rest of the year.
Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.
This document is a marketing communication and it may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (BBFM S.A.), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany, Italy, Spain and Netherlands the BBFM S.A is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by RBC Global Asset Management (UK) Limited (RBC GAM UK), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts at the registered office of the Swiss representative or at the registered office or place of residence of the investor shall have jurisdiction pertaining to claims in connection with the offering and/or advertising of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), the Packaged Retail and Insurance-based Investment Products - Key Information Documents (PRIIPs KID), where applicable, the Articles of Incorporation and any other document required, such as the Annual and Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Asia, by RBC Global Asset Management (Asia) Limited, which is registered with the Securities and Futures Commission (SFC) in Hong Kong. In Australia, RBC GAM UK is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, by RBC Global Asset Management Inc. (including PH&N Institutional) which is regulated by each provincial and territorial securities commission with which it is registered. RBC GAM UK is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits RBC GAM UK to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. In the United States, by RBC Global Asset Management (U.S.) Inc. ("RBC GAM-US"), an SEC registered investment adviser. The entities noted above are collectively referred to as “RBC BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of RBC BlueBay by the respective licensing or registering authorities. Not all products, services or investments described herein are available in all jurisdictions and some are available on a limited basis only, due to local regulatory and legal requirements.
This document is intended only for “Professional Clients” and “Eligible Counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) or the FCA); or in Switzerland for “Qualified Investors”, as defined in Article 10 of the Swiss Collective Investment Schemes Act and its implementing ordinance, or in the US by “Accredited Investors” (as defined in the Securities Act of 1933) or “Qualified Purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer.
Unless otherwise stated, all data has been sourced by RBC BlueBay. To the best of RBC BlueBay’s knowledge and belief this document is true and accurate at the date hereof. RBC BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. RBC BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only.
No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of RBC BlueBay. Copyright 2023 © RBC BlueBay. RBC Global Asset Management (RBC GAM) is the asset management division of Royal Bank of Canada (RBC) which includes RBC Global Asset Management (U.S.) Inc. (RBC GAM-US), RBC Global Asset Management Inc., RBC Global Asset Management (UK) Limited and RBC Global Asset Management (Asia) Limited, which are separate, but affiliated corporate entities. ® / Registered trademark(s) of Royal Bank of Canada and BlueBay Asset Management (Services) Ltd. Used under licence. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. RBC Global Asset Management (UK) Limited, registered office 100 Bishopsgate, London EC2N 4AA, registered in England and Wales number 03647343. All rights reserved.
Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.