What Types of Alternative Credit are Getting the Most Interest?

Alternative Credit is taking centre stage in professional investors fixed income portfolios.

Given the headwinds faced by traditional bond portfolios in a rising rate and inflationary environment. Plus the breakdown in equity-bond correlations that supported their role as a diversifier in the classic 60-40 portfolio, the future of fixed income portfolios is changing.

But what types of alternative credit are getting the most interest from professional investors? The opportunities are wide and varied, as are the risks.

Classic loans and CLO's have already received a lot of attention. With their floating rate nature, these instruments can protect fixed income investors as both interest rates and inflation rises. However, the question today is whether the credit fundamentals behind the issuers are strong enough to survive the expected steep path of rate rises ahead? Clearly, manager selection is key in this space. As are the sectors to which the portfolio is exposed.

Turning to MBS, all eyes are on the FED's Quantitative Tightening (QT). With both the FOMC meetings in March and May confirming the unprecedented move to sell MBS. The Fed currently has $2.7tn MBS on its balance sheet. Some active managers believe this dynamic can create profitable relative value opportunities, specifically in the agency MBS space. Other investors are still focussed on opportunities in the Dutch or Danish Mortgage market.

But whilst shortening duration and moving up in credit quality ratings seems to be the common focus, meaningful attention is turning to the debt financing of climate transition-oriented and energy security industries. Examples are biofuels, batteries and hydrogen. As well as digital infrastructure projects that facilitate a countries upgrade to fibre-optic broadband.

These were just a few of the alternative credit opportunities gaining traction in our fixed income feed.