In particular, Australian residential mortgage-backed securities (RMBS) and European banks stand out, especially as the US market experiences uncertainty and tight valuations, according to Perpetual portfolio manager Vivek Prabhu.

Prabhu noted that Aussie RMBS, which pool thousands of home loans, allow investors to “capture returns from Australians’ love of housing without lending directly to individual borrowers”.

“I’m swinging toward the high-quality end of the spectrum in this part of the credit and economic cycle. That’s where you get paid for risk right now,” Prabhu said, adding that Australia’s residential mortgage-backed securities fit his definition of a high-quality asset.

He highlighted the strong track record of Australian RMBS, which have historically performed well and avoided losses even during the Global Financial Crisis (GFC) and pandemic.

Prabhu further noted that this asset class is supported by a combination of favorable current conditions and a strong historical track record of performance. He added that low unemployment and interest rates nearing the peak of their cycle have allowed people to service their mortgages efficiently.

Perpetual also believes that unusually high property prices driven by high immigration further strengthen the investment case for this asset class.

"That means the collateral for these bonds, in terms of home owners' equity, is also favorable," Prabhu added.

European banks

Meanwhile, well-regulated and stronger European banks represent another attractive lending opportunity, according to Prabhu.

The improved profitability of Eurobanks was supported by tighter regulations and liquidity requirements imposed after the GFC, as well as the normalization of interest rates.

"I have close to 30 percent of my portfolio in foreign bonds, largely dedicated to European credit, which still offer good value compared to the expensive US market," he said.

Prabhu said both Australian RMBS and euro banks were where investors should shift their focus as US credit spreads hit historic lows and the prospect of lower interest rates fueled demand for higher yields.

"I haven't held US banks in my portfolio for about 18 months," he said.

"It's not because of any concerns about credit fundamentals - I'm just finding better risk and return propositions elsewhere."

Commenting on the US election, he stressed that Trump's purge of the House and Senate would likely lead to inflation with tax cuts and tariffs.

"This means interest rates stay higher for longer, which is a headwind for risk assets," he said.

“That being said, if the Democrats get in, they also have some big spending policies.

"A stalemate may be the best way out for markets -- with neither party having a clean shot before the Senate and House."