By Adrian Bender
G10 yields today paint a fairly bleak picture: negative yields represent around 6% of the market while almost 50% are between 0-1%. There is a danger of looking at the yields on developed markets bonds and concluding that there is no value, but with many factors driving the markets and creating opportunities to benefit from a well-diversified approach, there is plenty of alpha for the discerning investor.
We can no longer sit back and manage bond portfolios in the way we did before. Now it is about being more flexible, about diversification and about seeking relative value rather than just being directional.
We recommend taking a global macro view to benefit from the opportunities present across a variety of countries and regions whose economies, businesses and currencies are behaving in a lowly correlated manner, yet without any tangible threat of systemic risk at present.
Government bonds, corporate credit and foreign exchange all offer interesting returns though not necessarily in tandem. The range of derivative instruments now on the market enables investors to disengage these assets from a risk point of view and make choices to give them the best returns while minimising the less appealing aspects of the investment.
For example: while there is little further value in US, Japanese and UK government debt, we believe there may be more value in the eurozone periphery than the market thinks. Good economic performance in the US typically takes some time to be mirrored in the eurozone, yet with low interest rates, a currency which has weakened considerably and economic stimulation such as quantitative easing now in place, the medium term outlook for the eurozone periphery bond market is good relative to many G10 markets.
In addition, we are positive on Australian and Canadian bonds because these countries will have to go through fundamental restructuring after the downturn in the commodity super cycle. Conversely, with the Fed and the BoE looking to hike rates in the medium to long term, Treasuries and Gilts are looking less attractive.
Meanwhile, the pull of corporate credit has not diminished, with further significant inflows into this asset class. Technicals remain strong and the significant dispersion between regions has created numerous relative value opportunities. Euro-denominated credit has outperformed the UK and US by roughly 10% since 2012. Spreads have, however, become tighter – for example Volkswagen bonds have been issued at 0.65, whereas in the US comparable corporate credit is offering much higher yields.
Rotating away from eurozone corporate credit in favour of that in the US is now starting to offer better opportunities for our available funds.
Finally, we believe that many fixed income investors tend to shy away from the forex market due to its apparent complexity. But you cannot have a view on fixed income without having a view on forex, as the macro themes impacting the fixed income space will also apply to currencies.
Sterling has had a strong run versus most major currencies over the last several months, yet the uncertain outcome of the May general election is a threat overhanging the currency. It therefore makes sense to reassess exposure to sterling. Across the Atlantic, however, while Treasuries may not offer an encouraging outlook as interest rates may rise, the dollar may strengthen further and offer better prospects.
Adrian Bender is senior product specialist for the global fixed income and currency team at Amundi Asset Management
Comments