On the lookout for entry points On the lookout for entry points http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\hiker-walking-on-ice-small.jpg January 3 2024 January 4 2024

On the lookout for entry points

Three things to watch in 2024.

Published January 4 2024
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Economy We expect the U.S. economy to weaken in 2024, though the Federal Reserve’s recent dovish pivot has changed the calculus a bit. The probability of rate cuts in the back half of 2024 has risen substantially, but the Fed refuses to declare victory on inflation. While our forecasts lean toward a modest recession, a deeper downturn cannot be ruled out. That represents the biggest risk to the high-yield market, as it likely would lead to considerably higher spreads and default rates.  

Valuations Spreads ended November very tight versus historical levels. The spread to Treasuries (as measured by the Credit Suisse High Yield II benchmark) was 397 basis points at month-end versus a long-term median of 494. This development is driving most decision-making today. Investors seem to be pricing in a Goldilocks soft-landing scenario that is far from certain. When spreads are this tight, issuer fundamentals and free cash flow become paramount. You don’t want to own the underperformers when the tide turns and spreads widen. Markets can move quickly, so we are focusing on being nimble and ready to act when an attractive entry point emerges.

Green shoots Successful managers in 2024 will be able to capitalize quickly on the first signs of an economic sea change. We think that a slowdown or recession would be a sign to add or increase high-yield exposure as spreads likely will widen and relative valuations improve. Also, duration in this market is relatively short. Over the last decade, aggressive deals have been financed in the leveraged loan and private credit markets, boosting the credit quality of high-yield bonds. Be ready to deploy capital to high yield when broad valuations improve.

Tags 2024 Outlook .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates and a rise in interest rates can cause a decline in their prices.  In addition, fixed income investors should be aware of other risks such as credit risk, inflation risk, call risk and liquidity risk.

The Credit Suisse High Yield Index is designed to mirror the investable universe of the U.S. dollar-denominated high yield debt traded in the U.S. credit market. Indexes are unmanaged and investments cannot be made in an index.

Duration is a measure of a security’s price sensitivity to changes in interest rates. Securities with longer durations are more sensitive to changes in interest rates than securities of shorter durations.

High-yield, lower-rated securities generally entail greater market, credit/default and liquidity risk and may be more volatile than investment-grade securities. For example, their prices are more volatile, economic downturns and financial setbacks may affect their prices more negatively, and their trading market may be more limited.

Issued and approved by Federated Investment Management Company