Allocating to fixed-income sectors that are trading at cheaper relative valuations will be key for investors this year, according to Janus Henderson. That means looking beyond investment-grade credit, Treasurys and the Bloomberg U.S. Aggregate Bond Index, said John Lloyd, lead of the firm’s multi-sector credit strategies and portfolio manager. “Yields are still compelling overall, but spreads are very tight across a lot of sectors,” he said. Spreads measure the difference in yield between Treasurys and other fixed income assets of the same maturity. Securitized credit and bank loans were among the outperformers in fixed income last year, according to Janus Henderson. Still, even with that strong showing, yields remain solid versus historical yields, inflation expectations and the forward earnings yield of the S & P 500 , Lloyd noted. “Over a year period, even if you do hit rough spots, it’s much harder to get a negative return with those starting yields,” Lloyd said. Among the funds he manages is the Janus Henderson Multi-Sector Income Fund (JMUIX) , which seeks high income with lower volatility than a high-yield strategy. It has a 30-day SEC yield of 6.39% and a net expense ratio of 0.68% JMUIX 1Y mountain Janus Henderson Multi-Sector Income Fund Corporate bond alternatives Lloyd would look at collateralized loan obligations and asset-backed securities instead of investment-grade corporate bonds. CLOs are securitized pools of floating rate loans to businesses, although not all are investment grade. So-called ABS are backed by a pool of income-generating assets such as auto loans and credit card receivables. Within CLOs, Lloyd prefers the higher-rated securities, such as AAA, AA and A ratings. Investors can get 120 basis point spreads on new issues these days, he said, noting that this surpasses what investors might see with investment-grade credit. “You’re getting almost double the spread for very similar volatility,” he said. In addition, AAA has a higher rating than that of the investment-grade index, which is a BBB, he said. The Multi-Sector Income Fund has roughly 13% of its allocation in CLOs, as of Jan. 31. The firm also has its Janus Henderson AAA CLO ETF (JAAA) , which currently has a 5.37% 30-day SEC yield and a 0.2% expense ratio. JAAA 1Y mountain Janus Henderson AAA CLO ETF In general, Lloyd invests across the ABS market, although he hasn’t focused on student loans and solar. Overall, the consumer is still pretty healthy and underwriting has remained stringent in the space, he noted. The assets also tend to have shorter durations than investment-grade credit, Lloyd said. Duration is a measure of a bond’s price sensitivity to fluctuations in interest rates, and longer-dated issues tend to have greater duration. “Even if unemployment starts slipping, you’re still paying those down and they’re shorter in maturity, so you’re pretty well protected there,” he said of the ABS market. The Multi-Sector Income Fund has roughly 15% of its allocation in these assets. In 2024, AAA-rated CLOs had a total return of 7.1% and ABS had a 5% total return, according to Janus Henderson. In contrast, investment-grade corporates had a total return of 2.1% Opting for loans over high yield Bank loans look attractive over high-yield bonds because investors are getting spreads that are a little bit wider in loans for the same level of ratings, Lloyd said. “The tradeoff there is convexity, because in the loan market, at the beginning of the year, you had a 70% of loans trading above par, and you can get repriced,” he said. “Our view is, if high yield is trading at the first percentile and there’s not much spread outside there, that convexity doesn’t matter as much. So let’s pick up the spread.” Convexity is a measure of the relationship to bond prices and bond yields. Loans also have lower volatility than high-yield bonds, he added. Both asset classes performed well last year, with bank loans seeing a total return of 8.75% and high-yield returning 8.2%. Agency MBS Instead of allocating to Treasurys, investors can add exposure to agency mortgage-backed securities, which are also backed by the government, said Lloyd. The agency MBS asset class had a “perfect storm” over the last couple of years as the Federal Reserve started reducing its holdings in them and banks largely excited the market as well, he pointed out. They are also cheap compared to corporate bonds, he added. “You’re picking up some really good carry versus corporates that we historically haven’t had in the mortgage market,” Lloyd said. “Our view is we’d see a little bit of tightening,” he added. “Even if the agency market didn’t tighten, in this type of environment where spreads are really tight, you’re not taking credit risk and it provides a good diversification benefit as well in a multi-sector income portfolio.”
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