2022-Lite

We imagine a year where at times the market may look and feel like a “lite” version of 2022 – a year in which rising interest rates and tight credit spreads had a severely negative impact on bond returns – presenting serious challenges for fixed income investors. For this reason, we believe starting the year with a cautious and flexible approach to fixed income is prudent.

With corporate bond spreads hovering near the tightest in history (Chart 1), and high yield interest coverage ratios approaching what has historically been a danger zone of 4.5x (Chart 2), we’re opting to capture credit risk in the more attractively priced CLO market. Here, the structured nature of CLOs provides protection, while the floating rate component helps mitigate interest rate risk.

With Treasury yields likely to be supported by the backdrop of policy uncertainty, inflation pressures, government debt concerns, and moderate-to-strong economic growth, we maintain an underweight in duration. Like 2022, we expect that the transition from Act 1 to Act 2 could see a period of rising interest rates and the continuation of positive correlation between Treasuries and equities. This dynamic makes the front of the yield curve particularly appealing, where moderate sensitivity to interest rate movements offers relative safety until we have more clarity on the direction of growth and inflation.

At the same time, relative value opportunities in the agency mortgage-backed securities market provide a chance to generate alpha through active ETF management.

Every year brings moments of opportunity in fixed income. History reminds us of the following:

• 2022: The opportunity was in underweighting duration and avoiding credit risk
• 2023: Preferred securities became attractive following the collapse of SVB, with additional opportunities emerging in October’s rate sell-off.
• 2024: Fewer opportunities arose, but September offered one of the most compelling setups since 2022 to underweight duration.

We believe 2025 will be no different. A “2022-lite” scenario is likely to create meaningful fixed-income opportunities as volatility persists and we usher in Act 2. Whether it’s from corporate bond spread widening or a well-timed move into Treasuries, we expect several chances to deliver value this year.

In the meantime, we remain focused on staying liquid, maintaining high-quality positions, and avoiding asymmetric (to the downside) and overpriced bonds.

Michael Contopoulos
Director of Fixed Income

For more news, information, and analysis, visit the ETF Strategist Channel.

*Interest Coverage Ratio (ICR): Measures a company’s ability to pay interest on its debt, calculated as EBIT (earnings before interest and taxes) divided by interest expense—higher values indicate stronger financial health.

**Option-Adjusted Spread (OAS): The yield spread between a bond and risk-free Treasuries, adjusted for embedded options (e.g., call or put features), reflecting the true compensation for credit and liquidity risks.

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. RBA information may include statements concerning financial market trends and/or individual stocks, and are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. The investment strategy and broad themes discussed herein may be inappropriate for investors depending on their specific investment objectives and financial situation.

Information contained in the material has been obtained from sources believed to be reliable, but not guaranteed. You should note that the materials are provided “as is” without any express or implied warranties. Past performance is not a guarantee of future results. All investments

involve a degree of risk, including the risk of loss. No part of RBA’s materials may be reproduced in any form, or referred to in any other publication, without express written permission from RBA. Links to appearances and articles by employees of Richard Bernstein Advisors, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor’s investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment’s value. Graphs, charts, and tables are provided for illustrative purposes only. Investing is subject to market risks. Investors acknowledge and accept the potential loss of some or all of an investment’s value. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein.