Executive Summary
Although the market today is tight, we are seeing far greater differentiation across deals and structures than we have in a while. Spreads are tight and, in our view optimism is elevated, narrowing the margin for error; positioning emphasizes carry, quality, diversification, and vigilance around both macro and idiosyncratic risks (see Figure 1 below).
Figure 1: Bond Yields Remain Attractive Across Credit Markets │ Yield-to-Worst Range
As of September 30, 2025. Yields = Yields to Worst. Source: Bloomberg
Corporates = Bloomberg US Corporate Bond Index; High Yield = Bloomberg US Corporate High Yield Bond Index; Agency RMBS = Bloomberg US Mortgage-Backed Securities (MBS) Index; CMBS = Bloomberg US CMBS: ERISA Eligible Index; Sub. ABS = Bloomberg US Agg Subordinated ABS Total Return Value; Emerging Markets = Bloomberg Emerging Markets Hard Currency Aggregate Index.
Source: Bloomberg. It is not possible to invest directly in an index. Please see disclosures at the end of this presentation for additional information and index descriptions.
Investment Grade Credit:
It is our view going into the fourth quarter, to maintain an underweight to Investment Grade (IG) while favoring high quality, A-rated issuers in resilient, cash generative areas—consumer non-cyclicals, regulated utilities, select financials, and durable technology subsectors—plus select regional banks and insurance perpetual capital securities (PCaps)1 that offer a premium vs parent senior unsecured.
High Yield Credit:
High yield remains compelling on carry with broadly stable fundamentals but emphasize quality and issuer selection given dispersion and early signs of deterioration at the margin.
Securitized Credit:
We believe the securitized space, particularly Commercial Mortgaged Backed Securities (CMBS), presents significant long-term value following a challenging quarter as rating driven technicals widen spreads—especially in shorter duration tranches—while AI demand supports data center and fiber credits, and selective NYC office exposure benefits from rising return to office.
It is our view that multi-family fundamentals remain firmly supported by housing shortages and resilient demand. Recent fraud allegations at a subprime lender have pressured the overall subprime ABS market. These risks appear idiosyncratic rather than representative of the broader market.
Emerging Market Credit:
Local currency sovereigns benefit from USD depreciation as moderating Emerging Market (EM) inflation enables rate cuts without FX stress (source: Reuters). The consensus is for a prolonged USD bear cycle (source: Reuters), which may potentially drive flows into local currency bonds. Macro-driven upgrades are evident in countries like the Bahamas, Ecuador, Argentina, Turkey, and India (source: Bloomberg). Large, investment grade rated corporates are generally considered best-in-class due to sovereign support. High yield issuers have enjoyed low leverage, but we are starting to see some deterioration (source: JP Morgan). Airlines have rebounded post-COVID, and many are focused on profitable routes and business travel. Oil platform services in Brazil present unique opportunities. Idiosyncratic risks remain, however.
Strategy
The overall market trades at a discount, allowing for premium yields relative to traditional benchmarks. With the Fed expected to continue cutting rates, markets are pricing in even more easing. As rates fall, bond prices rise, but reinvestment risk increases as average portfolio yields decline. The market may be overly optimistic, so it is our intention to balance caution with opportunity.
Figure 2: Fixed Income Sector Outlook
1 Insurance Perpetual Capital Securities (P-Caps) are subordinated, perpetual debt-like instruments issued by insurance companies that offer high-yielding, equity-like features and are used to bolster regulatory capital without diluting shareholder equity.
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It is not possible to invest directly in an index. Past performance is not indicative of future result
Information included herein should not be considered predicative of future transactions or commitments made by MacKay Shields LLC nor as an indication of current or future profitability. There is no assurance investment objectives will be met. Past performance is not indicative of future results.
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