Fixed Income Asset Allocation Insights: Fundamentals for High Yield Issuers May Be Heading Up

The Republican sweep of the Senate, House, and presidency is likely to be pro-growth for the US economy and generally support corporate earnings.

Robert Vanden Assem, CFA
Head of Investment Grade Fixed Income and Chairman of Fixed Income Asset Allocation Team

In our most recent fixed income asset allocation team meeting, we decided to reduce the securitized products target allocation to 25% from 30% and to increase the high yield target allocation to 35% from 30%. We remain overweight on investment grade credit, with a target allocation of 30%, and underweight on emerging markets (EM) debt, with a 10% target allocation. Subsequent to the US presidential election, sharply higher Treasury rates and heavy outflows from retail mutual funds and exchange-traded funds (ETFs) have pressured high yield bond prices. However, in our view, high yield fundamentals stand to benefit under a Trump administration through tax cuts and increased infrastructure spending, as well as a firmer commodity backdrop.

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