Finding Income Opportunities Amid Economic Uncertainty
As the financial landscape grapples with uncertainties around trade tariffs and Federal Reserve policies, investors seeking income can still unearth promising avenues, suggests Goldman Sachs Asset Management. Following the Federal Reserve's recent announcement to keep interest rates steady after its two-day meeting, attention shifts to upcoming economic data and trade developments as key factors influencing future policy moves.
What Lies Ahead for Federal Reserve Policy?
The Fed has signaled expectations for two rate cuts in 2025, despite anticipating higher inflation and slower growth in the months to come. Yet, with tariff decisions looming—especially as temporary trade levy pauses expire in July—the economic picture remains complex.
Simon Dangoor, head of fixed income macro strategies at Goldman Sachs, emphasized the importance of the next few months: "The upcoming data will be crucial in revealing how tariff shocks truly ripple through the economy. There’s still considerable uncertainty around where trade policy will settle, and that uncertainty tends to accumulate over time." According to Dangoor, the Federal Reserve is likely to hold rates steady during the upcoming meeting but may pivot to reducing rates later in the year if the labor market shows signs of weakening.
Goldman’s Focus: Income Through Quality Credit Exposure
In this challenging environment marked by tight credit spreads, Goldman Sachs is zeroing in on income-generating opportunities supported by strong corporate fundamentals. Dangoor notes, "Credit spreads may seem expensive, yet solid discipline among corporations encourages us to build portfolios that deliver reliable carry."
Why Securitized Products Stand Out
Securitized products, particularly collateralized loan obligations (CLOs), emerge as attractive options for income seekers. The AAA-rated CLO segment—representing the highest quality tranche—currently offers compelling yields. For instance, the Janus Henderson AAA CLO ETF (JAAA) boasts a 30-day SEC yield of 5.35%. Strong investor demand for CLOs persists, even as the issuance of new underlying bank loans remains restrained. This balance of limited supply and robust appetite is expected to sustain CLO performance and income potential.
Dangoor elaborates, "We favor new-issue CLOs because their extended reinvestment periods allow for building portfolios of freshly underwritten loans reflecting current economic realities."
Spotlight on Commercial Mortgage-Backed Securities
Besides CLOs, select commercial mortgage-backed securities (CMBS) present value opportunities, especially single-asset, single-borrower (SASB) CMBS tied to high-quality office real estate. Despite requiring thorough underwriting, these structures offer attractive recovery profiles across various scenarios. Furthermore, many SASB deals have been refinanced to match prevailing interest rates, enhancing their resilience.
"For investors willing to dig into the underwriting," Dangoor points out, "these CMBS can offer solid downside protection and appealing value relative to risk."
Key Takeaways for Income Investors
- Federal Reserve action remains data-dependent, with potential rate cuts tied to labor market conditions.
- CLOs, especially AAA-rated tranches, offer attractive yields amid strong demand and limited new loan issuance.
- Selective CMBS investments can provide both value and downside protection.
- Overall, disciplined corporate behavior underpins confidence in credit markets despite tight spreads.
