American Century’s Greenblath Talks Fed, Yen Impact on Corporates

As the situation with the Yen carry trade continues to loom, investors may be closely watching their fixed income holdings. American Century Investments Head of Corporate Credit Jason Greenblath discussed the Yen’s impact as well as the shifting yield curve and how the firm is positioning its corporate bonds for that outlook in a recent conversation.Key Takeaways: The corporate debt market can be split into the hyperscalers and everyone else, he said. The firm looks for opportunities in cap structures like perpetual bonds, right now. The firm’s KORP ETF offers exposure to corporate bond opportunities with that expertise. Greenblath looked back on the last several weeks amid the Yen situation and that shifting rate outlook. The long end rates have stood out the most, he said, with the front end of the curve more stable. “Certainly the longer end of the curve, 10-year, 20-year, 30-year part of the rates curve has increased,” Greenblath said. “Part of that has to do with inflation expectations around the Fed, rate hikes, … does the Fed have control?” That shift may not be changing the overall outlook, he said, but it does further illustrate an important dynamic. Greenblath underscored a split situation in which one trend holds for the hyperscalers, and another for the rest of the corporate market. A particular issue worth noting, he said, is the $25 billion in “drive-by issuances” continually coming from AA issuers. “There’s only so many buyers in the long end before you start becoming bloated and you have to pay up to provide a concession for the next incremental buyer to step in and own their debt,” he said.Opportunities in Corporates? Greenblath Looks AheadGreenblath further explained that mispricing for the hyperscalers won’t be reverting, in his view, this year. Rather, market watchers may expect “one to two years” of mispricing. What’s more, he said, “once the capex issuance slows down,” markets may gravitate towards that debt once it looks cheap. Elsewhere, he said, risk isn’t mispriced in particular categories, but more so in the available debt structures. Capital structure, he said, has significant opportunities for strategies or investment teams equipped to exploit them. “Where is the risk mispriced today? It’s in specific structures. It could be down in cap structure, particularly for the banks,” Greenblath said. “That’s been an area … where we’ve found opportunities and kind of expanded that mindset to say it’s not just down in capital structure for European or U.S. banks, but also for investment grade borrowers in the hybrid part of their capital structure,” he added, pointing to pipelines, energy, utilities, and other areas using involved capital structures. See more: American Century’s Gotelli Talks Key Muni Bonds Opportunity As an example, he pointed to perpetual bonds, or perps, offered by banks as an appealing structure and opportunity set. Perps have no maturity date, but most do have call options, serving a “purely economic” purpose for banks, Greenblath said. Those offered in the past, when spreads were wider out of the pandemic, offer a particular appeal. “We’re looking for [perps] that were issued in the past, and we own them,” he said. “And our view is when you look at these very specific structures that have near-term calls [for the] next zero to 36 months, high backend resets, that is, call it prohibitive for the banks to extend them, that they will take them out.” “In in the interim, we’re owning something that’s either investment grade rated or high yield, so maybe double B plus or triple B minus rated,” he explained. “So just in that crossover space, and they’re offering yields of six plus percent.”Factors to Watch for InvestorsWhile the Yen carry trade situation — in which investors of all sizes potentially have to unwind their Yen loans, risking major selloffs — certainly does loom, Greenblath pointed to some other key factors for investors to watch. High grid corporates may see more “supply demand dynamics” as CapEx guidance increases for hyperscalers, for one. For another, he said, looking out a bit further into 2027, investors may want to be mindful of maturity walls in CLOs. “I think that we’re likely looking at higher default rates in leveraged bonds in 2027 and beyond,” he said. “And that’s something that’s not being priced into the market right now because spreads remain at historical tights.” As for what that means for the firm’s portfolios in corporates, Greenblath emphasized the importance of having a thesis behind investment decisions. Being specific with what one owns, and why, can help amid an uncertain situation. “If you sum this up, I’ll translate that into portfolio positioning,” he said. “Own a security with a thesis. Sell the ones that are just generic and beta, or where the thesis has played out. Be specific in the structures…where credit risks is worth taking down in cap structure, particularly for those hybrid instruments that I just mentioned.” American Century Investments offers the American Century Diversified Corporate Bond ETF (KORP B-) as a route into the space. Charging a 29 basis point fee, the fund may be worth considering for the expertise offered by Greenblath and his team. For more news, information, and analysis, visit the Core Strategies Content Hub.