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Global Investment Views: Fixed Income - April 2018

Perspectives» |

April 4, 2018

Diversify Sources of Return

The global economic outlook is consistent with less accommodative CBs and interest rates moving on an upward trend. We have revised our projected US GDP growth up to 2.9% in 2018, and we expect the global output gap to close this year, driving inflation cyclically higher. Historically, aggregate indices were able to offer diversification from equity through the duration channel and credit spread cushion. In the new market environment, high duration, low but rising interest rates, and tight credit spreads leave investors with very little protection. So, it is important to broaden sources of diversification in an effort to protect income and capital and achieve decent total returns.


DM government bonds

We still favor a short duration bias on core govies (shorter in the Eurozone vs the US). The 10-year yield differential between the Treasury and Bund is very high, due to CB asynchronies. We expect it to close as the ECB starts to engineer the exit path from unconventional measures. Duration positioning should be short in Japan as well (the BoJ could lift the 10-year yield target, and the unwinding of negative interest rate policies should then follow) and in the UK (inflation pickup). Curve movements can also provide opportunities: a flattening of the Euro yield curve is likely, as the 5- 30Y segment is too steep in core markets, and we could expect a repricing of the short end of the curve when the ECB becomes less dovish. On the short end of the US curve, we don’t see particular value yet, but there is no reason to be too short due to current levels of rates. On peripheral bonds, we are still positive (Italy and Spain) as well as on inflation linkers in both the Eurozone and the US.

 

DM corporate bonds

Macro conditions and fundamentals are good, but valuations remain high. We are constructive on this asset class, but investors should consider strategies to reduce credit risk (short dated bonds, higher liquidity, and upgrades in quality). In the Eurozone, demand is high and the growth outlook supportive: we keep a positive view on subordinated bonds (financials and nonfinancials), where spreads are still attractive. In the US IG space, leverage is decreasing (although it is still high), sales are robust and capex is recovering. We prefer banking, insurance and energy. We believe that investors should consider other diversification strategies, such as securitized assets in the US or alternative credit stories in Europe.

 

EM Bonds

The US rate outlook will continue to drive risk sentiment globally in the next few months, but we see a relatively good resilience of EM debt to higher rates (modest spread widening). Economic fundamentals remain strong and many countries are at the earliest stages of the cycle (ie, Russia and Brazil). Reduced volatility for commodities and a weak dollar are also supportive for the outlook of EM currencies, even though the evolution on trade policy has to be carefully watched. We reiterate our view that there is little upside from spread compression and EM bonds remain a carry trade story for 2018. Short-term debt offers, in our view, a good risk/reward balance. Corporate debt is still favored vs sovereign, thanks to the benign default outlook. At the country level, selection remains key: we look at Brazil (still good value with improving fundamentals), Russia (as oil play, plus improving domestic conditions), and Mexico, and are recently more constructive on South Africa, based on the changing political landscape. Hedging strategies (where spreads are too tight) can be considered at this stage to mitigate risk.

 

FX

Our 2018 target for the €/US$ is still at 1.25, with an upward bias towards the 1.25-1.30 range. We have a negative bias on UK sterling and the yen vs the euro and the US$ dollar.
GIC_Fixed Income_4.4.18

Important Information

 

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of April 4, 2018.

The views expressed regarding market and economic trends are those of the authors and not necessarily Amundi Pioneer, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested.

This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service.

 

Date of First Use: April 4, 2018.

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Contributing Authors

Ken Taubes
Chief Investment Officer, US, Amundi Pioneer

 

Eric Brard
Head of Fixed Income, Amundi