June brought a major change to the bond landscape with the arrival of the new Federal Reserve chair. Kevin Warsh, appointed by President Trump, arrived as a new Fed chair. He’s making big changes already, like not submitting a dot plot and trying to curtail forward projections. Warsh’s induction as the new chair was the most notable event for June, according to American Century Investments Vice President, Senior Portfolio Manager, and Director of Corporate Credit Research Jason Greenblath.
Key Takeaways:
- The commencement of new Fed Chair Kevin Warsh’s tenure was a key moment in June.
- Corporate bond tights (i.e. tight credit spreads) remain near historical highs, with opportunities potentially looming in major hyperscale tech company supply.
- Active corporate bond ETFs could present a strong use case in that tight, events-driven landscape.
Greenblath shared his thoughts on the Fed chair and other movements in the bond market in a recent interview. He pointed to a positive market response to Warsh’s arrival overall. That said, the lack of dot plots and being more data dependent could add volatility, he said.
“With Chairman Warsh coming in…there’s not going to be a whole lot of forward guidance. I think that that was generally well received by the market, {and} changed the shape of the interest rate curve,” he said.
Amid that shift, then, where is risk most mispriced following June? For Greenblath, the biggest dislocation in the corporate market, specifically investment grade, is in high quality, AA-rated 10- and 30-year bonds.
See more: American Century’s Greenblath Talks Credit Risk on Schwab Network
Spreads in the corporate space are near 30-year highs for tights, he said. Looking back to recent events like the start of the U.S.-Israel-Iran war in March and Liberation Day, the biggest retracement in spreads has occurred among the hyperscalers, he noted.
“You go down the list of the hyperscalers that are AA rated coming with $25 billion. If you didn’t get it this time, you’re probably going to have another opportunity in a quarter or two, or if it’s maybe in 2027, there’s a lot more supply to come,” he said.
“Right now it’s concentrated particularly in 30-year AA rated corporates that we think are mispriced,” he added. “That is an opportunity, in our minds, that is creating attractive entry points for active managers willing to be selective. It’s also something that may not reverse itself very quickly, because of all the additional supply coming over the next, call it two years.”
Downside Risks to Corporates
As for downside risks, Greenblath again underscored event risk as the main source of concern for corporate bonds. Comcast (one of the largest issuers in the investment-grade corporate bond market), for example, announced a split into two companies. That has prompted ratings agencies to place it under review for potential downgrades.
“As bond investors, you don’t want companies breaking apart, because you want more cashflow to support the leverage of the balance sheet,” Greenblath said. “And at tight spreads, these are the types of things where investors can be exposed to negative event risk.”
Active management, by contrast, can look to adapt and even take advantage of events. American Century’s Diversified Corporate Bond ETF (KORP ) provides an active approach to those corporate bonds. KORP charges a 29 bps fee. The fund could provide a solid option to get exposure to the shifting corporate bond landscape.
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