Credit spreads across the United States and Europe have tightened to historically low levels, leaving limited reward for simply holding long credit positions. This environment makes relative-value trades, cross-market opportunities, and other active strategies increasingly important. While tight spreads reduce the attractiveness of directional beta, Findlay Franklin, Portfolio Manager on RBC BlueBay’s Multi-Asset Credit team, sees “pretty great dispersion at the underlying level,” creating fertile ground for skilled fixed-income managers.
“Now is a particularly interesting time in fixed income,” says Franklin. “There are several dynamics at play: some unique to this cycle, and others we’ve seen before.” On the surface, spreads in both Europe and the U.S. look tight, but when you dig deeper, the picture changes, according to Franklin. Dispersion across individual bonds remains substantial, providing ample opportunities for active managers.
“Your headline index might read 275, for example, but if you plot the distribution of individual bonds and their respective yield or spread buckets, you get a clear view of where the real opportunities lie.”
At RBC BlueBay, Franklin and the team deconstruct indices to uncover opportunities hidden behind aggregate spread levels. “Your headline index might read 275, for example, but if you plot the distribution of individual bonds and their respective yield or spread buckets, you get a clear view of where the real opportunities lie,” he explains. Currently, he sees a broad range of potential trades. “For a multi-asset strategy that can go long, short, and move across the spectrum, the opportunity set is quite compelling,” Franklin adds.
Global Shifts and Regime Changes
This comes amid several global changes, including shifts in interest rate regimes, the end of U.S. exceptionalism, and fiscal momentum in Europe. “We’re entering a regime shift,” Franklin notes. “After a period of elevated central bank rates, we’re starting to see them come down, which opens interesting opportunities and makes duration more attractive than it has been for a while.”
Second, the perceived end of U.S. exceptionalism is on many investors’ minds. “While U.S. corporate strength remains, political and trade developments under Donald Trump – and their broader implications for the dollar system – create interesting opportunities globally,” says Franklin. This shift has also placed Europe in the spotlight, “pushing it into a position where it needs to respond,” he adds, particularly in areas like defense spending. “Germany, for example, is starting to take action, and this fiscal impetus is expected to create further opportunities in European markets.”
Franklin highlights emerging markets as another area of potential. “Particularly in EM local currency, you’re starting to see a detachment from some of the more familiar market correlations, and a structural weakening of the dollar, which is clearly beneficial for local currency FX,” he says. This, in turn, provides scope for local central banks to cut rates and for credit opportunities to expand beyond traditional markets.
Flexible Allocation Across Multiple Strategies
As a multi-strategy portfolio manager overseeing – with specialisms captured including global high yield, leveraged loans, securitized credit, emerging-market debt, and more hedge fund-like strategies – Franklin emphasizes the importance of flexible allocation. “Our job is to manage top-down risk allocation, understand where risk is coming from, and identify what we like and don’t like across the spectrum,” he explains.
“Even though optically fixed income may look less attractive than it did a year or two ago, dispersion remains, and we are not concerned in any way, shape or form.”
The BlueBay Fixed Income’s specialist platform encourages collaboration and idea-sharing across teams. “We’ve broken down silos between the teams, allowing us to cast the net widely. This approach has helped us achieve a strong track record,” says Franklin. By combining five different credit strategies, each driven by distinct performance factors, the team can focus on risk-adjusted returns while remaining largely decorrelated.
“There’s a real opportunity here,” Franklin concludes. “Even though optically fixed income may look less attractive than it did a year or two ago, dispersion remains, and we are not concerned in any way, shape or form,” he adds. “In an approach like ours, we can exploit markets where beta premiums are low, and the directionality of markets matters less.”
