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‘Fed has gotten more constructive in the near-term:’ Wells Fargo Head of Credit Strategy

Yahoo Finance’s Alexis Christoforous and Winnie Cisar, Wells Fargo Head of Credit Strategy, discuss investments heading into 2021.

Video Transcript

ALEXIS CHRISTOFOROUS: Joining us now is Winnie Cisar. She is Head of Credit Strategy at Wells Fargo. Winnie, good to see you. I'm curious, given what you saw the Fed announce already, what are you expecting to hear? Or what would you like to hear from Fed Chair Jay Powell at today's press conference?

WINNIE CISAR: Thanks for having me today. So we're expecting to hear a continued cautious dovish message. We're particularly focused on the kind of reracked outlook for the economy. It does seem that the Fed has gotten a little bit more constructive in the near term growth and employment outlook than their last summary of economic projections. And within that vein, there's a lot of moving pieces.

We need to have the Fed maintain its dovish policy, while also acknowledging that, perhaps, the economy is going to continue to maintain momentum, particularly if we do see some fiscal stimulus come down the pike over the next couple of days.

And so that really puts asset prices, particularly, in corporate credit and kind of this tenuous situation and requires investors to be much more nimble than they have been for a lot of this year, where the beta compression trade was a really solid trade for a pretty extended period since March.

- Winnie, what would you ask Jay Powell if you were at the press conference?

WINNIE CISAR: I would ask him what kind of the upside scenario actually is. If we start to see growth accelerate, perhaps at a greater than expected pace sooner than the second half of 2021, if we look at the labor markets and their projections for over the next 12 months, it kind of gets us to a similar level to where we were in 2015 or 2016, when the Fed had actually started to telegraph a message of tighter policy.

So I do think that there are some kind of pieces that need to be reconciled in terms of the economic outlook, how it compares to historic precedent with what the Fed has done from a policy perspective, and really, if there are long-term concerns about real structural changes to the economy that require the Fed to stay in zero interest rate policy and quantitative easing basically in perpetuity. That's something that credit investors really need to know.

ALEXIS CHRISTOFOROUS: When you look at bond market opportunities in 2021, the early part of 2021, what will look attractive? Will high yield and leveraged loans look a little more attractive then than they do, perhaps, right now?

WINNIE CISAR: So we are constructive on high yield and leveraged loans. We've been pretty constructive on high yield for a good chunk of this year, post the real spike in volatility in March. And we're starting to get much more constructive on loans as well, mostly because the dollar price upside there is pretty considerable relative to the fixed income universe.

If we expect that the economy is going to continue to recover over the next 12 months, default rates should continue to fall to lower levels closer to kind of long-term median levels, and the capital markets stay open, then leveraged finance is probably a pretty good trade.

Especially if that front end of the yield curve remains really pinned down, I think that any sort of steepening in the Treasury curve, even modest steepening, can do some pretty significant damage to investment grade portfolios, where duration is much longer. It's gotten much more extended over the course of this year with issuance.

And that means the potential for total return losses up in quality out of the curve are pretty material as we rerack to whatever new yield curve regime we end up in, even if it's a modest steepening. So we're very constructive on the leverage finance universe, even though it does feel like high yield yields at 4.4% are kind of a tenuous start to the year.

ALEXIS CHRISTOFOROUS: All right, Winnie Cisar, Head of Credit Strategy at Wells Fargo. Thanks for joining us today.