How Neuberger Berman is positioned as volatility rocks global debt markets

Staying nimble and remaining responsive to opportunities as they present themselves is one of the key aspects of how Neuberger Berman’s Adam Grotzinger is currently positioned within global credit.

In his recent sit-down with Livewire Markets during a visit to Sydney, the senior portfolio manager detailed how his multi-asset portfolios are currently positioned. 

Comparing and contrasting his exposures now versus a year ago, and pre-pandemic, Grotzinger discusses two of his preferred sectors. As volatility has returned to the debt markets, these areas of corporate debt have highly motivated management teams and are being shaken up by long-heralded interest rate movements. A key question Grotzinger poses – and answers – is what’s already been priced in by the market? Read on to find out.

Edited transcript

What are your preferred debt markets currently and why?

Adam Grotzinger: Given the volatility we've seen in markets this year, relative value has been evolving pretty fluidly. And so, right now, I'd say the preferred areas where we're seeing good value in the market as a function of repricing of interest rate risk, and as a function of corporate spreads or credit margins widening as the market needs to price higher probabilities of recession on a forward-looking horizon is that you can go into the higher quality ends of the credit markets and get better value.

So, BBB corporate credit in the US market is attractive to us today. Things like the telco sector in particular, where not only have you had widening of interest rates or rising yields and widening spreads, but you've had a lot of new issuance, which has created a technical distortion in that market.

Other areas are the high-quality ends of the high yield market. The mortgage market is also presenting some opportunities of value, now that spreads have widened.

And even things like mortgage credit are starting to present value, due to a combination of macro factors, rates and supply, creating better pricing in those markets and better protection against downside forward-looking.

Why are telecommunications and mortgage credit two of your preferred exposures?

Grotzinger: There's been a lot of new issuance from telco companies this year on the backdrop of yields starting the year. They're tight, widening as a result of yields and rates going higher in the US market. And we think a lot of these names are strong BBB credits.

Management teams have been very clear that they don't want to have their companies downgraded to BB. So, there's the incentive for management teams to stay BBB and their bonds have weakened significant this year, partly due to new issuance in a more volatile market backdrop.

In the mortgage market, we think that's starting to look interesting. You've seen widening in mortgage spreads as result of concerns in the market around interest rate volatility. So, there’s a combination of interest rate volatility, cheapening a lot of things, but also quantitative tightening and the implications that's going to have as the Fed steps away as a big buyer in the mortgage market. You have to ask yourself, what's already in the price? And in our view, some of that's already in the price and hence offering better value.

How is your portfolio positioned now versus 12 months ago, and versus pre-pandemic times?

Grotzinger: Let's start with now versus the last year or so. Through 2021, we had a pretty aggressive risk posture. We thought it was a conducive environment to take risks. We are near our strategies’ maximum allocation to high yield credit, for instance. And the regime of 2021 rewarded that, which was volatility, suppression, and central banks that were still accommodative and strong underlying credit fundamentals in those markets.

As we got into the second half of 2021, through the third quarter and fourth quarter, our outlook was changing. And the outlook before 2022 started was that, while fundamental growth may still be resilient and strong – consumers are good and corporate balance sheets are good – the macro landscape's changing, particularly the Fed’s policy. And the volatility suppression of '21 was likely not the case in 2022. And interest rate directionality would be challenging. Yields rising is just challenging for a broad swathe of bond markets.

In response, we reduced risk in our portfolios coming into late '21, putting a lot of those proceeds into cash and cash equivalents as ballast as we entered 2022. And to be more able to allocate to dislocated opportunities such as BBB bonds, telcos, and mortgage paper as we discussed earlier. But we're also cognisant that we're not in a rush to get back to the risk budget of 2021, which was high for a reason. It’s more about nibbling at opportunities using tactical management, looking for areas of significant dislocation, and redeploying gradually into those opportunities is our mentality over the course of this year.

Looking all the way back to March 2020, it’s a very similar dynamic. We came into that environment, which was late in the economic cycle, then COVID hit. A lot of our existing portfolio was in well-underwritten credit. We weren't reaching for yield at that point in time. So, when COVID hit, we had a moderate risk budget. We saw some drawdowns, but importantly those drawdowns were more marks than reflections of impairment on our existing positioning. And we had suitable liquidity to raise through our treasury positions to again be better buyers of dislocations that emerged. And then we were buying high-grade mortgages at the start of the crisis. That was the first area of deployment, particularly as the Fed started to step in and support markets and add liquidity.

That sums up our approach, focusing on relative value and prudent risk management coming into these environments, and being able to be better buyers at risk at the right times to enhance income and enhance returns over time.

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