Sarah Harrison, senior portfolio manager at Allspring Global Investments, discusses the firm’s evolving view on valuations across European and US credit markets this year. As the US government shutdown disrupts the release of key economic data, she explains how her buy-side team is bridging information gaps and adapting its forecasting models. Harrison also outlines how portfolio managers collaborate closely with traders to execute cost-effective strategies, highlighting the firm’s growing use of portfolio trading in 2025. She concludes with insights on what trading desks should be mindful of as markets head into the final months of the year.
Transcript
Jo Gallagher – We’ve seen some recent cracks in the private credit space, there’s been ongoing tariff concerns and also a tick up in default rates in some fixed income markets. How are you seeing these factors influence valuations across the US and European credit spectrum, and how are you positioning as a result?
Sarah Harrison – So we have been overweight Europe versus the US in high yield, I think, since our first conversation back in 2023, and that trade has now finally just about played out. So relative value between the two is a lot more balanced when you factor in how credit spreads have moved in each region, as well as how hedging costs have moved. We do still have a marginal bias towards Europe, but nowhere near the limit long we were running just one year ago. As is our team’s view in most areas of fixed income, at the moment, we have a bias towards quality income and high yield, and continue to run with an underweight to triple C’s. The core high-yield market is expensive, and the tail looks cheap, but in most cases, the tail is cheap for a good reason. Key drivers of performance over the next year will be avoiding the parts of the core market that move into the tail and picking one or two names in that tail currently that will return to core.
Jo Gallagher – The US government shutdown has disrupted the distribution of key economic data. How do you manage and adapt your forecasting models when there are gaps in critical data sources?
Sarah Harrison – So as we know, the shutdown started on October 1. Most importantly, for credit markets, the collection and distribution of data from the Census Bureau, the Bureau of Labor Statistics and the Bureau of Economic Analysis is paused. This week alone there are a bunch of scheduled releases that we are unlikely to see. So you’ve got construction spending, factory orders, but actually, arguably the biggie, the most important, is Non-Farm payrolls. This is a data release that even if you only tangentially follow markets, you are on top of. The market moves on big surprises in Non Farm Payroll numbers, either to the upside or downside. Allspring is a big credit shop with a large and experienced fundamental credit research team. Our team is getting information firsthand from the companies that they cover via earnings calls, via management meetings, via conferences. The trends and rhetoric that we hear directly from management teams are coincident, if not leading, indicators, which will be super helpful in navigating this period, if the data disruption persists.
Jo Gallagher – When communicating your orders and positions, how do you collaborate with traders on the desk to execute cost-effective strategies and optimize protocol use?
Sarah Harrison – Yeah, I mean, so portfolio trades has been a theme for us this year, and there’s definitely been a shift in how economical it is to do portfolio trades versus going line by line in recent years. Our counterparties have become more sophisticated in how they price these trades. It’s also viewed as a growth area by many of the sell-side places, and so for the investor, it’s fantastic because pricing is now quite competitive. We’ve done a few large, high-yield portfolio trades this year, and the savings versus going line by line is quite evident. Most of the trades that we do are price sensitive. There will be the odd case where we think that there will be a gap higher or lower in price, and we just want to get the risk on or off. But being a relative value-focused team, most trades only make sense at a certain level or target. Working to targets over a couple of days for larger sizes, is, in our view, the better way to go than to simply get the trade done as quickly as possible in one go immediately. High-yield is still very much a person-to-person trading environment, so having a dedicated trader who is in the market all day, every day, is the key to executing.
Jo Gallagher – So as we approach the final few weeks of 2025, what else do trading desks need to be aware of?
Sarah Harrison – So, a post- an everything rally, it’s always a good time to reassess and re-underwrite from a single-name perspective. We’ve seen some decompression between single B’s and double B’s in recent weeks, but it looks a lot more pronounced than it actually has been. The move has been led by a handful of multiple point movers that were previously trading in line with their ratings category and ignoring the view that they potentially had significantly worse fundamentals. These types of names are now starting to fall out of bed. Now that we’re in a period of reassessment before year-end, discipline from a security selection perspective is key.
Jo Gallagher – Thank you, Sarah, for your insight, and of course, you for watching this has been Trader TV This Week.
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