Corporate | Insight Investment | Insight Investment

• Muni market pain creates a compelling relative-value opportunity in high yield bonds

  Recent market dislocations have pushed certain long-dated AAA yields above BB corporate yields on a tax-equivalent basis for investors in the highest tax brackets. The past month was punishing for Treasury bonds and even more painful for municipal markets, where tax-loss harvesting and month-end positioning added to the dislocation. In our view, the negative cycle can persist until interest rate volatility eases. But once the smoke clears, we think investors will find it difficult to ignore the yield opportunity in high grade municipal bonds. Not only are yields high, but municipal yield curves are steeper than comparable corporate curves in certain maturity ranges, offering meaningful potential for a “roll down effect” if market conditions remain broadly stable. We are leaning into the weakness in portfolios and using the selloff to invest selectively, while recognising that yields could rise further and municipal bonds remain subject to interest-rate, credit, liquidity and tax risks.

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• Scouting opportunities beyond mainstream credit markets

  Within multi-sector credit strategies, we continue to find some of the most attractive risk-adjusted opportunities away from traditional developed market credit. Emerging market corporates offer lower leverage and stronger growth prospects than many developed market peers, while asset-backed securities continue to benefit from a complexity premium that rewards investors with specialist expertise. By contrast, investment grade credit markets are likely to face continued spread widening pressure in the short term as the market struggles to absorb high levels of issuance related to the AI infrastructure build out.

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• Strong European high yield fundamentals continue to draw investors

  The European high yield market continues to benefit from a favourable technical backdrop. Inflows remain positive, defaults are low and corporate fundamentals have generally held up well. While investors are closely monitoring risks including energy prices, sovereign dynamics and AI-related capital spending, attractive yields, relatively low duration and improving credit quality continue to underpin demand. We would view a market pullback as an opportunity to add to positions we like or positions that had previously been expensive.

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