The high probability of a shallow recession in the United States puts corporate credit, and high-yield bonds in particular, in a "sweet spot," according to AllianceBernstein Holding LP co-head of fixed income Gershon Distenfeld.
"It's gonna clip your coupon, you're not going to have a lot of defaults and your returns may even be better than in the equity markets," Distenfeld said on Bloomberg TV on Thursday.
The world's debt market is on track to post its biggest two-month gain on record as traders ramp up expectations that central banks everywhere will slash interest rates next year. In equities, the Nasdaq 100 is poised for its best year since 1999 and the S&P 500 is just a few points away from its record.
"You've gotten a lot of the return already in the past couple of months," he said. "We think there's more to come. We think rates are going to continue to decline as the [Federal Reserve] normalizes policy."
The riskiest tier of the junk bond market, CCC, has gained nearly 20% year to date on a total return basis, making it the best-performing asset class in the U.S. fixed-income market. These kinds of returns make junk bonds more competitive today with the booming world of private credit than we've seen in quite some time, he added.
"That premium has come down from the private credit market," said Distenfeld. "We're also probably going to see higher loss rates in the private credit market."
Distenfeld is expecting mid single-digit returns in fixed income broadly in 2024, sentiments echoed by Steve Dulake, global head of credit research at JPMorgan Chase.
"2024 is setting up to be more of a coupon clipping year," said Distenfeld, referring to holding securities to maturity and collecting interest payments. "Maybe get a little capital appreciation. You lose a little bit from default, but I don't see big differentiation."
He finds valuations more attractive in Europe than in the U.S. though the economic picture isn't as rosy.
"It's always important to remind investors that when you invest outside of the United States as a U.S. investor, there's no reason to take the currency risk on," he said. "You should do it on a hedge basis."
