Aside from capital market related concerns, Mr. Sosa said he is also hearing from institutional clients that they are worried about the negative impact of potential write-downs on private market holdings.
"The last couple of years have marked record inflows into riskier and less liquid parts of the fixed income market as investors were looking for higher yielding opportunities," he noted. Looking ahead, with a backdrop of interest rates normalizing, he expects to see more positive flows to higher quality investment-grade debt.
Mr. Sosa also said he does not think the failure of Silicon Valley Bank marked the beginning of a systemic issue for the U.S. banking system.
"However, our firm's outlook for bank fundamental credit is negative," he cautioned. "Higher funding costs, falling net interest margins, weak/negative loan growth, subdued capital markets activities, weakened tangible capital levels and further expected deterioration in asset quality as the economy inevitably slows will all weigh on credit strength."
He also expects further rating pressures from credit agencies to emerge in the U.S. regional banking sector "after the panic is addressed by regulators given the inevitable flow through to the real economy in the form of tighter lending standards, weak loan growth, higher non-performing loans, and loan loss reserving."
Noting that Breckinridge focuses on high quality fixed income, dividend income and sustainable investing strategies, Mr. Sosa remains "cautious" with his firm's portfolios defensively positioned. "We continue to favor higher-quality corporates over Treasuries reflecting healthy fundamentals, albeit at less compelling valuations," he stated.
Now that interest rates have normalized around the world with more fair valuations across the asset class spectrum, Mr. Sosa believes that fixed-income now "sits on much sturdier ground," making it a more compelling consideration for investors looking to increase their bond allocations.
"We believe that we may be in the early stages of a new secular trend which when combined with near-term uncertainties, positive real rates, and attractive yields, should all favor increased flows to investment grade fixed income," he added.
Mr. Sosa also observed that 2022 — which saw both stocks and bonds both perform poorly — was an outlier.
"While periods of positive correlations are not unusual, they typically don't persist for long periods of time," he noted. "We believe that a rapid rise of yields in 2022 marked the end of the cheap money era, making the case for increased exposures to investment grade fixed income more compelling."
In his conversations with institutional investors, he noted, the general sentiment towards fixed income had been negative up until recently as most investors are now expressing interest in increasing their exposure to this asset class.
Breckinridge had $44 billion in assets under management as of March 31.