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Fixed income

Fallen angels to currencies: Attractive yield plays today

July 01, 2025 - 6 min

Kennedy: We think rates are going to head marginally higher, even from today's levels in here. And I would caveat that by saying that the most recent developments in the Middle East could change that. Certainly, some of the geopolitical implications are very large right now. If we were to see a full-fledged war with troops on the ground in the Middle East, I think that all bets are off.

As far as the direction of interest rates, you would likely see more of a flight to quality at that point. Although is it going to be into the dollar, or will it be someplace else? Will it be into the Treasury market?

But I think, absent that, you would likely see a move higher in here. Again, tariffs and the unpredictable nature of where the tariffs are going to end up and what that means for inflation in here, the resiliency of global economies, including where we are in the US in here, and then also supply concerns– again, the tax bill in the US is an unknown right now, but it does look like it would be significantly bad as far as the deficit is concerned. And so that would mean additional supply in the Treasury market.

So, we do think that means the Fed's on hold for a period of time. I think the Fed is really looking at inflation expectations at this point. They're still higher than they want out there. 

I do think the immigration implications of what we're seeing in the US also means that the unemployment rate largely stays below 4.5% going forward for the rest of the year. And so, if I think about what the Fed's really trying to do here, you want a stable inflation over the medium term and full employment. And then neither side of that right now are we at the point where the Fed can really comfortably cut rates.

So, we think they're probably going to be on hold at least until the fall, but maybe even into the end of this year. So the markets have, time and again, priced in more rate cuts than the Fed has actually come through with. And I think we're starting to see that. And we have seen that again through this cycle.

Kennedy: The credit markets have held up really well. You have to remember we're coming off a period of exceptionally pristine balance sheets in corporate America going back the last few years. So, what we're starting to see now is a little bit of, I would say, an off-the-top kind of a condition where profit margins are weakening a little bit, leverage is up, interest coverage is down. But we're now just getting back to a period of time where you consider it to be metrics that would equate to late cycle.

And so, I look at the balance sheets today in corporate America, and they're still in pretty good shape overall right now. So a little bit of degradation, but nothing significant. 

I would say one phenomenon that we're seeing that we think may present an opportunity for us is fallen angels. So, we haven't seen a lot of companies get downgraded in the last few years from investment grade down to high yield. But most recently, you've seen Nissan, Celanese, Whirlpool, and Warner Brothers Discovery all downgraded from investment-grade ratings down to high yield.

Fallen angels is one of our six pillars of investing. It's typically a really good opportunity for us. And so even when we are starting to see some corporate metrics break down in that market, we do think that there's opportunities there.

Kennedy: There's really three I would point to that I think look favorable at this point in time. Securitized credit, so we talk a lot about corporate credit, but I would also say that we can pivot to securitized credit in these portfolios, as well. And so, we generally don't invest in agency mortgages. But you do have a very large and increasingly growing market in corporate ABS as well as the CLO market.

And so, we look at that market and say it's an offshoot of corporate credit, where you still need to know your issuers, but they're largely shorter duration amortizing structures. And you can get into areas such as borrowing in data centers or fiber transactions, aircraft leasing. And so, you do get away from some of the consumer element that you've typically known in the asset-backed market.

Again, what I like about those is they're amortizing. So, as we talk about this higher-for-longer interest rate environment and reinvesting at higher rates, we're constantly getting cash thrown off on a lot of these shorter-duration products that we think are helpful. The CLO market is now $1 trillion market. We think that that's a good investment, as well, particularly in the AA and AAA ratings areas there.

I'd also point to bank loans. 5 and 6B-rated bank loans, we think, are an opportunity even above and beyond investment-grade credit as far as where returns can go right now. You don't have the type of convexity that we typically like in bank loans. And so, what we're really looking for are names that can add an additional 25 to 50 basis points of yield to make up for the lack of convexity in those structures.

And then the last one, I think, which may present us with one of the best opportunities for total return, would be in the non-dollar space. And so, as we continue to see the de-dollarization of trade take place in here, there's likely fewer dollars that are going to get recycled back into either the Treasury market or the US corporate markets over time. That presents opportunities for other currencies to appreciate against the dollar.

We also think that there's some currencies out there that may not appreciate against the dollar, but are also a very high and attractive yield, as well. So, I think it's a combination of yield in the non-dollar space, but also some currencies that can appreciate against the dollar.

The resilience of the US economy, coupled with supply concerns in the Treasury market, has led to a higher-for-longer interest rate environment. Here, Brian Kennedy, Portfolio Manager on Loomis, Sayles & Company’s Full Discretion Team, discusses the challenges and opportunities for the second half of the year.

Key takeaways:

  • The current higher-for-longer interest rate environment is beneficial for savers but poses challenges for borrowers, including the US Treasury and corporations. The focus has shifted from reinvestment risk to principal preservation, and there is value in reinvesting at higher yields.
  • Interest rates are expected to head marginally higher in the second half of 2025, but recent developments in the Middle East could change this outlook. Geopolitical implications, such as a potential full-fledged war, could lead to a flight to quality, affecting the direction of interest rates.
  • The Federal Reserve is likely to remain on hold for a period of time, focusing on inflation expectations and full employment. Markets often price in more rate cuts than the Fed has delivered, and this trend is expected to continue.
  • Credit markets have remained strong, benefiting from exceptionally pristine balance sheets in corporate America over the past few years. However, there are signs of weakening profit margins, increased leverage, and reduced interest coverage, indicating a late-cycle phase.
  • A notable opportunity in the market is the emergence of "fallen angels," companies that have been downgraded from investment grade to high yield ratings. Recent examples include Nissan, Celanese, Whirlpool, and Warner Brothers Discovery.

This material is provided for informational purposes only and should not be construed as investment advice. The analysis and opinions expressed represent the views of the author as of June 2025, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted. Actual results may vary.

All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided. Investors should fully understand the risks associated with any investment prior to investing. Equity securities are volatile and can decline significantly in response to broad market and economic conditions.

Fixed income securities may carry one or more of the following risks: credit, interest rate (as interest rates rise, bond prices usually fall), inflation and liquidity.

Interest rate risk is a major risk to all bondholders. As rates rise, existing bonds that offer a lower rate of return decline in value because newly issued bonds that pay higher rates are more attractive to investors.

Duration risk measures a bond's price sensitivity to interest rate changes. Bond funds and individual bonds with a longer duration (a measure of the expected life of a security) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations.

References to specific securities are for informational purposes only and should not be construed as a recommendation to buy or sell.

Natixis Distribution, LLC is a limited purpose broker-dealer and the distributor of various registered investment companies for which advisory services are provided by member companies of Natixis Investment Managers.

Natixis Distribution, LLC (fund distributor, member FINRA | SIPC) and Loomis, Sayles & Company, LLC are affiliated.

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