ab9 January 2024Global Research and Evidence LabGlobal StrategyWhat is the optimal positioning to maximize income in 2024?Details on the methodology/model are in our report - What is the optimal way to add income to Multi-Asset portfolios amidst heightened uncertainty?We expect more range-bound spreads over the next 3-6 monthsIn our last piece, we revised our 2024 US Credit Outlook with a less severe spread widening to be backward-loaded in H2. In Europe, technicals remain healthy and the disinflation trend seems to continue in the right direction. Still, valuations remain tight, especially as ETFs emphasized the spread tightening in December, pushing spreads below their pre-SVB levels. As we are yet to see the full impact of higher rates on fundamentals, we think the direction of travel for spreads remains in a range, probably slightly wider. Global financial conditions remaining tight, we believe the best way to add income to a multi-asset portfolio is still to favour fixed-income over equity assets. While seasonality suggests January is volatile (elevated supply, earnings, etc.), we think it makes sense to implement carry strategies over the month to maximize income in portfolios. We highlight our best carry allocation/trade ideas to implement for 2024.When could technicals become less favourable? Focus on credit derivativesBased on recent issuance and projected flows from CTAs, technicals appear to remain strong for the asset class. Supply for the first week of the year (€30bn, IG only) was well absorbed by the market (with ~2.5x oversubscription rate for ~15bp of NIP) and the asset class continues to see inflows from both ETFs and MFs. We expect this trend to continue in the short-term. When does the music stop? If we focus on derivatives, CTAs remain very positive so far, with a max long momentum signal at 1.00. Based on our last projections, we would enter the responsive zone of the signal if Main/Xover were to widen by ~16/56bp in the next 2 weeks, which would be equivalent to 3/2.2x the move we experienced during the sell-off we had last week (Figure 6 & 7). In the US, CDX HY looks more vulnerable than IG, 50bp+ away from the responsive zone (Figure 4 & 5Figure 4 & 5).Where is the carry? We compare C/V ratios by maturity bucket across regionsAs of today, the model still suggests that in spreads terms, the front-end is still the most attractive part of the credit curve... but not as much as it used to be 3m ago given the recent rally. In spreads terms, the very front-end outperformed quite significantly the rest of the curve, which means that a slight extension of duration is now needed in order to get a C/V ratio above 1. The front-end of GBP IG remains a great source of diversification to maximize income in spreads, not yields given the rally in Gilt over the past month and a half. Across re...
