Janus Henderson index suggests Fed will achieve soft landing

Credit risk indicators from Janus Henderson Investors have stopped flashing all red for the first time since central banks stepped up a fight against inflation, suggesting the Federal Reserve looks increasingly likely to achieve a coveted "soft landing."

Access to capital markets as well as cash flow and earnings are now amber on the asset manager’s traffic light system, having been red since the third quarter of 2022. A debt load and servicing indicator remains red.

This easing of some risk signals comes as expectations of interest-rate cuts by major central banks in 2024 have reduced the cost of company debt in recent months, making it easier to refinance old debt with new. That brings the policymaker goal of curbing inflation without triggering a major economic slump, known in the market as a soft landing, into sight.

“The Fed has already signaled a pivot in policy rates,” Jim Cielinski, global head of fixed income at Janus Henderson, said in a statement Monday. “We are slightly overweight credit and see further spread tightening as likely if the consensus ‘soft landing’ narrative holds.”

The cash flows indicator turned to amber after better-than-expected economic data in the US and “the bottoming” of purchasing managers’ index numbers in Europe, the firm said. Access to capital improved thanks to a slump in yields late last year and a continuing drop in corporate bond spreads in early 2024.

By contrast, credit fundamentals worsened slightly, with default rates picking up in US and European junk-rated firms, keeping the debt load and servicing indicator in the red.

Janus Henderson, which manages around £263 billion ($332 billion) in assets, sees high-grade firms as offering “the most attractive blend” of credit spreads, which will tighten in a soft landing, and price sensitivity to interest rates — known as duration — that benefits from rate-cut expectations.

While money markets have moderated their bets this year on cuts, they are still pricing in more than four 25 basis-point reductions by the European Central Bank by the end of 2024.

Meanwhile, “fading recession fears” are evident in portfolio trades, where investors have mostly bought triple-B rated notes, which lie in the lowest rungs of the high-grade spectrum, according to BofA Securities strategists led by Yuri Seliger.

Janus is focusing on quality firms as it’s unclear if companies’ financial health has really turned a corner. Still, the backdrop is getting rosier.

“The soft landing, the friendlier central banks’ stance — all this tends to be supportive,” said Janus’s Cielinski. “We don’t expect heroics from the corporate bond segment, but we think they can do better than just the coupon or carry that they provide.”