Michael Buchanan, Deputy CIO, Western Asset Management part of the Franklin Templeton Group
I think some of the best opportunities in fixed-income right now are those sectors that have a heavy emphasis on income as a portion of their total return. It’s really just about capturing good, reliable, consistent income. Corporate credit, I think is in a pretty good spot there, in particular, high-yield where we continue to see a trend toward improving credit quality and that market in aggregate.
We want to be with corporate credit that can navigate throughout a whole range of different macro backdrops. I think that that leads us more to perhaps not going for the highest beta, most yield opportunities in high yield. But let’s stay with those solid single B’s, double B’s, where we think there’s very good relative value.
Fraser Lundie, Head of Fixed Income Public Markets, Federated Hermes Limited
The combination of high inflation and a weakening global economic outlook has fuelled concerns about how far central banks will be able to raise interest rates without overburdening the economy. The outlook was already uncertain, with rising labour costs, supply-chain disruption and commodity prices that have leapt since Russia’s invasion of Ukraine all forming headwinds, but the key question is where to from here? The Federal Reserve now seems determined to tighten until inflation notably slows.
Meanwhile large industrial areas of China remain shut as zero covid policy is favoured at the expense of a slowing economy, and there are some signs of the conflict in Ukraine may be headed for a ceasefire. These evolving stories in the US, Asia and Europe could plausibly lead to lower commodity prices and lower inflation break-evens and with yields in US Investment Grade and US High Yield now surpassing 4% and 7% respectively, there is good value to be had whilst we sit and wait.
Vincent Mortimer, Group CIO Amundi Asset Manager
In bonds, the market has moved fast in repricing a more aggressive stance from the Fed. The initial moves were concentrated on the short part of the government bond yield curve, but more recently the 10-year part has also started rising further, with the 10-year yield reaching the 2.9% level.
While longer term the rate trajectory remains upwards, it no longer makes sense to remain as short as we have been in the recent past, especially on the front end of the curve given the latest market movements, and therefore we are tactically adjusting our duration stance. There is room to play tactical relative value opportunities and curve opportunities in Australia and Canada, as well as in France, where the uncertainty over the presidential election outcome has driven spreads higher.
In corporate bonds (credit), we remain cautious and have moved further towards less risky names across the fixed income dedicated allocations. In our search for income, we are becoming more positive in EMBI (JP Morgan Emerging Market Bond Index).
After the recent yield rise, the EMBI market should be supported by the stabilising US 10-year yields, oil gradually moving down and the improving EM-DM gap (emerging market – developed market). The EMBI composition, tilted towards LatAm and towards commodity exporters, is also a positive contributor.
Diversification remains crucial. We believe adding real asset exposure in areas more resilient to inflation (infrastructure, loans with floating rates and real estate) and using strategies that offer low correlation compared with traditional asset classes could help navigate this unfriendly market environment.
Anthony Kirkham, Portfolio Manager for the Western Asset Australian Bond Fund
“We think the market has now factored in too many interest rate hikes and therefore we increased our duration overweight in late March and have continued to do so in April.
“We believe that once the market settles down, the credit spreads will be able to consolidate and ultimately tighten from here as the fundamentals return to being the main focus.
“We note that investment grade corporate space in Australia is a standout due to the type and quality of issuers in our market, all of which are generally able to pass on any inflationary pressure due to monopolistic duopolistic positions, not to mention the regulated assets that are also prevalent in our market, who can obviously just pass this on through their pricing resets.
“Supranationals, sovereign and agencies (SSAs) are also offering solid value, having seen their spreads widen due to excessive selling by Japanese insurers who saw their annuity products triggered due to the super high Aussie dollar versus a weakening yen. We will reallocate to these bonds once we believe the selling is done.
“We will keep our duration and curve positioning very active to capture the volatility in markets. We managed to capture the moves in the first quarter. Obviously, we’ll look to capture the expected volatility in markets in Q2 as well.”
