Non-recessionary rate-cutting cycle should support credit, Pinebridge says

By Matt Tracy

WASHINGTON, Nov 20 (Reuters) - Asset manager PineBridge Investments said in a report that it is seeing the start of a rare non-recessionary interest rate-cutting cycle that should support performance of fixed income assets like leveraged finance.

President Donald Trump's election victory and Republicans' takeover of the House of Representatives and the Senate will add to pro-growth policies and further support risk assets from a fundamental perspective, while introducing potential headwinds outside the U.S. and more restrictive trade policies, the report issued on Tuesday said.

Stimulative fiscal policies will add to near-term inflationary pressures, resulting in a less accommodative Federal Reserve and yield curves remaining at recently elevated levels.

In contrast, a weaker economic outlook for Europe would allow the ECB to cut rates at a steady pace, which should bolster a stronger U.S. dollar, the report said.

Tight valuations, reflected in record tight corporate credit spreads, would, however, offset positive fundamentals.

"We thus see a benefit in being 'centrist" and balanced in portfolio risk positioning," said the report authored by Pinebridge's Steven Oh, global head of credit and fixed income.

Leveraged credits are likely to benefit as interest rates were being cut when economic growth, while slowing, was firm. Low unemployment and a soft landing (or no landing) is highly likely or may have already occurred, the note said.

Despite its overall bullishness for U.S. fixed income investments, PineBridge said it was selective across industries and issuers given market uncertainties, ongoing U.S. budget issues, the expected introduction of new trade tariffs and ongoing conflicts in the Middle East, and the war between Russia and Ukraine.

The asset manager suggested investors seek opportunities to create dry powder without sacrificing yield like buying AA-rated collateralized loan obligations or CLOs, which can provide yield comparable to riskier BB-rated high-yield bonds.

The asset manager with over $200 billion of assets under management was also constructive on mortgage-backed securities and suggested emerging market assets for diversity.

"We view such 'yield-equivalent dry powder' as a critical element in fixed income positioning in 2025," the note said. (Reporting by Matt Tracy; editing by Jonathan Oatis)