Value is back

June 21, 2022

The value is back in public market fixed income and private markets look a little less shiny.

Mark Dowding recently sat down with Institutional Investor to share his insights into the macroeconomic developments of 2022 and how they are impacting the fixed income markets.

It was getting to the point where you almost wondered if “fixed income” needed a new name.

“Last year, all people wanted to talk about was private markets,” says Mark Dowding, CIO, BlueBay Asset Management. “There was no income left in fixed income. High yield was no longer high yield.”

The fixation on private markets hasn’t waned, but Dowding, who is never at a loss for an unvarnished truth bomb, believes many investors are showing their “lemming” tendencies – and missing an opportunity in the process.

“The intense focus on private markets begs the question if many investors are simply chasing what’s happened in the recent past,” says Dowding.

“A lot of value has come back to public market fixed income,” he continues. “We came into the year with US high yield at about 4.5% and today it’s almost double that – it’s back to being high yield again.”

View of value

For investors who can take a medium-term view – which should include vast numbers of institutional investors – Dowding sees the opportunity in fixed income shaping up in juxtaposition to the public equities market.

“I think there is value in US high yields north of 7.5%,” he says. “Default rates will rise a bit, but right now they are incredibly low. Even if the default rate reaches 3%, there’s value to be had in areas like high yield and emerging markets if you’re taking more of a medium-term asset allocation view.”

In the near term, investors are more likely to be considering when to add more risk to their overall portfolios. The S&P and the NASDAQ are down considerably year-to-date, but both are still substantially higher than they were at end of 2019. If the recent correction in equities continues a bit longer, investors might anticipate the remaining performance gap to close near the top of the market pre-Covid.

“To some degree, I look at equities as risk assets that take the lead in this environment,” says Dowding. “And the outlook for them could be a bit challenging short term – you really don’t want to load up on risk assets just yet. The market is getting a bit oversold. You’re probably going to be paid to add some risk when the time is right. From our perspective, we feel that timing is influenced by when the trajectory of inflation heads back toward the Fed’s inflation target.”

A cautious eye on private markets

In contrast to his optimism around public fixed income, Dowding says he is “becoming more concerned about private markets in general.”

“In private equity, there are a lot of deals chasing very high IRR [internal rate of return] combined with high exposure to tech companies,” he says. “About 10% of the NASDAQ is down 90% so far this year. Smaller entities, which are trading on multiples to cash flow and revenues rather than making any profit, are taking the worst price performance hits.”

As a result, investors are likely to see companies that are burning cash and need to refinance. When that occurs, the accompanying material markdowns will impair some private equity vehicles.

“Some of the big [alternatives] firms out there are running private debt alongside private equity, and I can see challenges coming in the private credit space, too,” says Dowding. “Investors really should give some serious thought to these considerations instead of just impulsively chasing the crowd and the shiny objects.”

Influences on the opportunity in public fixed income markets

Dowding is bemused by the bum rap that the Fed gets domestically in the US, and instead is impressed with the work done by America’s central bank.

“The Fed is filled with bright minds and thoughtful people,” says Dowding. “I meet with many central banks, and some are pretty darn hopeless. The ECB is currently staffed with politicians who know little about monetary policy, and the Bank of England is making a dog’s dinner of controlling inflation. The US could be doing a lot worse than what it has in the Fed.”

To Dowding, who meets with Fed representatives in Washington, D.C. fairly regularly, the bank is currently on point to keep the US economy on the rails even if the ride is a little bumpy. He is quite optimistic that the US will avoid a full-blown recession, thanks in large part to the efforts of the Fed.

“I’m putting only a 30% probability on a recession in the U.S. in the next 18 months. In the eurozone, I think it would be 50% plus. And in the UK, I think we’re already in a recession,” says Dowding. “China looks more and more like an economy in recession. The property market there is still massively overvalued. Some of the dynamics in the Chinese property market look a little bit like we saw in the US in 2008.”

Comparatively speaking, the Fed is assertively tackling the current environment, according to Dowding.

“They might have been a bit surprised by the fact that six months ago no one expected the level of inflation that we’ve seen, but in response they’ve been racing to tighten financial conditions and get ahead of the curve,” says Dowding.

“The clear narrative when I speak with the Fed is they’re going to keep on hiking rates until PCE [Personal Consumption Expenditures Price Index] goes below 3%,” he continues. “I think it’ll be back to that level by this time next year. If the path is the Fed keeps hiking rates and it’s frontloaded, you end up with rates getting to 3.25% or so and it’s largely priced-in to markets already.”

“If that scenario pans out, the US economy and markets will likely experience a soft-ish landing,” says Dowding.  Some other things need to happen – a slow-down in growth, for example – but in the round Dowding believes it’s doable.
If inflation stays more elevated and the job market remains hot the PCE core could end up stuck at around 4%. Even in that scenario, Dowding has faith in the Fed.

“The Fed knows that the longer inflation is away from the target, the more it gets embedded into inflation expectations,” Dowding says. “It will use all the tools at its disposal to keep things moving in the right direction. They don’t want a recession – no one does – but if we need one, it’s better to have a small one sooner than a big one later.”

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.

This document may be produced and issued by the following entities: in the European Economic Area (EEA), by BlueBay Funds Management Company S.A. (the ManCo), which is regulated by the Commission de Surveillance du Secteur Financier (CSSF). In Germany and Italy, the ManCo is operating under a branch passport pursuant to the Undertakings for Collective Investment in Transferable Securities Directive (2009/65/EC) and the Alternative Investment Fund Managers Directive (2011/61/EU). In the United Kingdom (UK) by BlueBay Asset Management LLP (BBAM LLP), which is authorised and regulated by the UK Financial Conduct Authority (FCA), registered with the US Securities and Exchange Commission (SEC) and is a member of the National Futures Association (NFA) as authorised by the US Commodity Futures Trading Commission (CFTC). In Switzerland, by BlueBay Asset Management AG where the Representative and Paying Agent is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland. The place of performance is at the registered office of the Representative. The courts of the registered office of the Swiss representative shall have jurisdiction pertaining to claims in connection with the distribution of shares in Switzerland. The Prospectus, the Key Investor Information Documents (KIIDs), where applicable, the Articles of Incorporation and any other applicable documents required, such as the Annual or Semi-Annual Reports, may be obtained free of charge from the Representative in Switzerland. In Japan, by BlueBay Asset Management International Limited which is registered with the Kanto Local Finance Bureau of Ministry of Finance, Japan. In Australia, BlueBay is exempt from the requirement to hold an Australian financial services license under the Corporations Act in respect of financial services as it is regulated by the FCA under the laws of the UK which differ from Australian laws. In Canada, BBAM LLP is not registered under securities laws and is relying on the international dealer exemption under applicable provincial securities legislation, which permits BBAM LLP to carry out certain specified dealer activities for those Canadian residents that qualify as "a Canadian permitted client”, as such term is defined under applicable securities legislation. The BlueBay group entities noted above are collectively referred to as “BlueBay” within this document. The registrations and memberships noted should not be interpreted as an endorsement or approval of BlueBay by the respective licensing or registering authorities. Unless otherwise stated, all data has been sourced by BlueBay. To the best of BlueBay’s knowledge and belief this document is true and accurate at the date hereof. BlueBay makes no express or implied warranties or representations with respect to the information contained in this document and hereby expressly disclaim all warranties of accuracy, completeness or fitness for a particular purpose. Opinions and estimates constitute our judgment and are subject to change without notice. BlueBay does not provide investment or other advice and nothing in this document constitutes any advice, nor should be interpreted as such. This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product in any jurisdiction and is for information purposes only. This document is intended only for “professional clients” and “eligible counterparties” (as defined by the Markets in Financial Instruments Directive (“MiFID”) ) or in the US by “accredited investors” (as defined in the Securities Act of 1933) or “qualified purchasers” (as defined in the Investment Company Act of 1940) as applicable and should not be relied upon by any other category of customer. No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2022 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates. ® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at All rights reserved.

Sign up for insights by email

Subscribe now to receive the latest investment and economic insights from our experts, sent straight to your inbox.