PGIM Fixed Income: US election results are both good news and bad news
Gregory Peters, Co-Chief Investment Officer of PGIM Fixed Income, comments on the US election results:
- From a broader perspective, the correlation between global Treasury rates should continue to decline amid the dispersion in growth and inflation dynamics, likely prompting more uneven central bank policy responses. As a result, these may be conditions where European and EM local rates outperform as continuation of the relatively strong backdrop for the U.S. dollar may only serve to push non-U.S. policy rates lower.
- Within multi-sector strategies, we are already using the post-election rally to pare certain risk exposures. It is really a simple story of asymmetric risk/reward as tight spread levels squarely cap the upside, leaving one quite vulnerable to the downside. While there are technical reasons that spreads may continue to grind tighter—e.g., the consistent bid for long corporates from pension funds/LDI players—that is a component of the rationale to pare risk into market strength. As we reduce certain areas of risk, we also continue to focus on safe carry opportunities.
- Looking ahead, this is a good news, bad news story. The bad news is that passive allocators may experience lagging returns relative to the risk they assume. The good news is that dispersion across the sector will remain high, which should continue to provide ample opportunity for credit selection throughout the various stages of a credit cycle.