We still see pockets of dislocations among loans and high-yield bonds. Even though spreads have narrowed, underperformance from lower-rated commercial paper is noticeable, reflecting default and downgrade worries.
While overall pricing has improved, riskier tranches remain far off their pre-pandemic levels. Assuming volatility stays muted, the near-0% interest rate environment could spur appetite for these higher-yielding securities. According to FINRA data, 2020 has been the most active year in CLO secondary offerings. Ratings agencies have placed many CLOs on negative watch due to potential loan collateral downgrades and defaults.
Through July, year-to-date new issuance volume was down 26% compared to last year. We continue to like ABS, particularly consumer deals, due to their short-duration and high-quality profiles. Several consumer-related sectors have recouped their COVID-19-related widening, and we see limited spread tightening soon.
Housing data has been encouraging. Tight inventory remains a tailwind for home prices, while low mortgage rates will incentivize purchases. We continue to see value in non-agency RMBS and place great emphasis on credit selection.
Even though sentiment has improved, the recovery in CMBS spreads has lagged other fixed-income sectors as COVID-19 wreaked havoc on commercial real estate. However, higher hotel occupancies and reopening malls are among the signs suggesting fundamentals are recovering.
We generally favor quality, defensive, income-generating stocks. We’re currently overweight real estate investment trusts (REITs). The sector has struggled due to rent payment concerns. We believe peak virus fear is mostly behind us, and attractive valuations could generate investor enthusiasm as states reopen.
References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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