Macro takes center stage as fundamentals materialize
Key takeaways
- The Fed’s focus on employment supports a soft landing, an ideal environment for credit.
- We continue to prefer high yield, where current income is supported by strong fundamentals and investors may realize upside on pricing.
- Rising loan distress may present idiosyncratic tactical opportunities, but “buying-the-market” conflicts with the current balance of risks.
Landing the plane
Passengers please be seated. The Fed has begun its descent. You may experience mild turbulence, but we expect to have a soft landing. Following the latest meeting of the Federal Open Market Committee (FOMC), Chairman Powell announced a 50 basis point reduction in the target federal funds rate, a seminal milestone in the Fed’s fight against inflation. Citing emerging signs of softness in the labor market, the move appears to indicate a pivot toward a more balanced view of the risks to each side of the Fed’s mandate (inflation and maximum employment). While we remain of the view that inflation’s path to 2% will be choppy due to supply-side risks, namely geopolitical uncertainty, low housing inventory, and unyieldingly sticky services inflation, real progress has been made. With the Fed forecasting real GDP growth of 2% in 2025, and the continued strength of GDPNow estimates for 2.9% growth in Q3, we take the Fed’s renewed focus on the labor market as a positive development for credit. Indeed, we expect the remainder of 2024 and early 2025 to be an ideal environment for credit investors. Despite tight spreads, yields today offer an attractive level of real income, and are firmly supported by constructive credit fundamentals and a constructive technical setup defined by a multiyear undersupply of net new issuance and meaningful price convexity.
