PGIM Fixed Income: Despite the rally, attractive values can still be found in a number of areas

April 16, 2024

Greg Peters, Co-Chief Investment Officer of PGIM Fixed Income, names three areas in the bond market that are still attractively valued.

Investment-grade corporates and high-yield, which at times last year were great values, look less attractive now, as much of the juice has already been squeezed out. But despite the rally, attractive values can still be found in a number of areas, with yield characteristics quite attractive overall. That’s where individual security selection matters. 

Financials stand to benefit from stable or falling rates in this new regime. While there was much hand wringing about the health of the banking system—especially regional banks—after Silicon Valley Bank’s collapse in March 2023, deposit outflows have since stabilized. Banks have been able to rebuild capital, and should soon see increased stability with Basel III Endgame, a new set of banking regulations, on the horizon. These new regulations would increase capital buffers for the biggest banks in the banking system and guard against the issues that caused the collapse of the U.S. regionals.

There are significant tailwinds for emerging markets. Favorable developments for EM include fierce competition between the U.S. and China for hegemony in the global south; the movement of supply chains out of China and growing foreign direct investment in other EMs; and the rising demand for commodities like lithium and copper to build out new technologies and green infrastructure. With inflation in EM countries falling faster than developed markets, the rate cutting cycle would greatly benefit EM growth as real rates remain positive. Of course, not all emerging markets are the same—investors should look at countries such as Indonesia, India and Mexico that are growing rapidly and benefitting directly from the shift in supply chains.

There’s value in high quality structured products, like commercial mortgage-backed securities which has been tainted by concerns around commercial real estate since the pandemic broke out. But ever since the global financial crisis, CMBS structures have tightened up, with subordination reducing credit risk and providing investors with a quicker path to being repaid in the event of defaults. While worries persist about the immediate future of office space in a world where many more people are working from home, the asset class is trading at an attractive discount and the worst predictions of lasting damage to the commercial market seem overblown.