Transcript: High-yield credit holding up well in face of volatility
But Siena Sheldon of Brandywine Global says signs of stress are being seen in traditional safe havens like Treasuries and the U.S. dollar
- Featuring: Siena Sheldon
- May 27, 2025 May 23, 2025
- 13:01
iStockphoto/spawns
Siena Sheldon
Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking interest rates with Siena Sheldon, vice president, client portfolio manager with Brandywine Global Investment Management. We talked about what markets are looking for this year, and what we should expect from the Bank of Canada and the U.S. Federal Reserve. And we started by looking at how fixed income has fared so far this year.
Siena Sheldon (SS): Well, it’s no secret there has been extreme volatility, and that’s been driven, obviously, by tariff headlines, which has led to uncertainty in the market. And it seems the market is just consistently trying to recalibrate what the base case is for these tariffs, and therefore the outlook. What’s been really interesting is that despite the volatility, many riskier assets within fixed income like high-yield corporate credit have held up relatively well. At the same time, traditional safe havens like U.S. Treasuries haven’t always consistently behaved as expected this year. Longer-term yields in the U.S. did move up in some of that risk-off sentiment that we’ve had. And that’s partly because people are nervous about U.S. fiscal deficits. The dollar, another traditional safe haven, has also been taking a hit as investors really start to rebalance portfolios away from U.S. assets, which they have been structurally overweight to for a very long time. In high-yield credit, while credit spreads have widened at times, yield cushion and strong fundamentals have really helped cushion some of that impact. It looks like for now, really the worst-case scenario is off the table after China and the U.S. agreed to a 90-day pause in tariffs. But that doesn’t mean we’re out of the volatility yet. Headline sensitivity remains really high, and volatility will likely continue as the tariff picture evolves.
What she’s expecting from the Bank of Canada
SS: Consensus is currently anticipating one to two additional rate cuts by year end, and that would place the policy rate just above that 2% level. It would also keep the spread between the Fed and the Bank of Canada at around 150 to 175 basis points. We’re not expecting the Bank of Canada to diverge significantly beyond that spread level. While Canada’s economy is showing signs of softness, policy rates are already pretty low, and that will be even more so after about two more cuts.
The autonomy of the Federal Reserve
SS: Fed chairman Powell has made it clear that the Fed won’t respond to White House pressure. And if markets did get the sense that it was caving to any political pressure, that would probably backfire pretty fast. In other words, if Fed independence were compromised, we could see the bond market react. Yields would move higher, which is pretty much exactly what the Trump administration does not want. The dollar would also likely take a hit, and even within Trump’s own party, there would likely be pushback if the perception grew that the Fed had become politicized.
What fixed-income instruments she likes in the current moment
SS: In a stagflationary backdrop, we like higher-yielding, shorter-duration bonds. Rates are really going to continue to be volatile, so you want to stay underweight duration. Specifically, we like shorter-dated high yield, as it offers both yield cushion and that pull-to-par dynamic. When you’re shorter duration in credit, it also tends to be less sensitive to swings in Treasury yields, which we have seen so much of this year. Because, again, we do think Treasury yields are going to oscillate between growth risk and inflation risk for some time. And being in longer-dated credits are going to expose you to that. We also like mortgage-backed securities. These also offer great yield and have a higher-quality skew, and also have credit risk that’s differentiated from corporate credit as it’s more tied to the U.S. housing market, which is still in structurally low supply. On the other hand, we are underweight the dollar. We do believe the next couple of months is really going to be a story of global growth convergence versus what we saw in 2024. And that should weaken the dollar. In light of that, emerging market debt should do well in a weakening-dollar environment. At the same time, select emerging markets are still offering really attractive, real and nominal yields.
And, finally, what’s the bottom line for fixed income investors?
SS: Bottom line right now: Keep it shorter duration or underweight duration, stay selective and focus on gathering income. Treasury yields are caught in this push-pull between growth risks and price pressures. Unless we get a deep recession, you’re unlikely to see U.S. yields break meaningfully lower. Shorter-dated higher-coupon credits offer solid income, help cushion against moderate spread widening and have less exposure to rate volatility. This is going to continue to be a headline-driven market, so clipping coupon, doing the bottom-up credit work and being nimble in volatility is going to be key this year.
Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Siena Sheldon of Brandywine Global Investment Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.
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