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Global Investment Views: Fixed Income - March 2018

Perspectives» |

March 9, 2018

Back to a More “Normal” Market

The “normal” relationship between strong growth, higher inflation expectations and higher interest rates finally seems to have been restored. This new phase signals a normalisation in fixed income conditions, where fundamentals will regain their key role.


The transition has not been smooth: in less than six months, 10-year yields in the US have risen from 2% to 2.9% and the 10-year German bund yield has doubled since December. This environment calls for an active approach to fixed income: active in duration management (short with rising rates, but neutral/long when the economic cycle slows down), active in currency management (as CB policies are not fully synchronized), and active in security selection in credit (overall quite tight) to find the right balance between risk and reward. This also calls for enhancing sources of diversification both to hedge against inflation risk (inflation-linked bonds) and to capture stronger economic growth (convertibles). On the USD, momentum has been weak, but higher US real rates will start to attract capital reverting the recent trend.

DM government bonds

Core govies are adjusting for higher inflation and less dovish CB. Investors should keep a short duration position, in all the core markets (Eurozone, US, UK, Japan). In the US, 3% is a psychological threshold for the 10-year Treasury yield, which we believe will be tested in the short term, while 3.5% would be a level to watch to consider a move to neutrality on duration. Pressure on rates will remain high in 2018. The market will have to absorb a huge amount of net issuance, with higher deficits fueled by a fiscal expansion, which comes after a long expansion. In the Eurozone, sovereign spreads tightened year-to-date as the ratings of several countries have been upgraded and economic activity remains strong. We remain mildly constructive on peripheral bonds, on Italy in particular, but opportunities have diminished.

DM corporate bonds

Credit has been relatively resilient in this phase, amid strong fundamentals and, in the Eurozone, technical support by the ECB purchasing program and strong demand. Carry trades, we believe, will remain well supported, even if less so than in the past 12 months. In the EU, we prefer subordinated debt (financial and non-financial). The HY market still offers moderate value: strong growth is a supportive factor, but leverage is high, especially in the US, though less so in Europe. Based on our analysis, one-third of US HY companies remain in challenging situations and could become vulnerable in case of further risk aversion. The Euro HY secondary market is supported by limited net supply, as the loan market is currently more attractive for issuers. Persistently high levels of equity volatility represent the major threat to the market. To deal with this, we believe investors should focus on highly liquid/high-quality securities.

EM Bonds

EM bonds held well during the market sell off, with the high beta credit suffering the most, especially in Latin America. Market valuations are still tight, but fundamentals remain strong. A catalyst for a strong reversal in flows could be a strong dollar or US 10-year treasury yield aggressively raising toward 3.5%. These conditions are not in our base scenario. We still believe that returns of EM debt in hard currency can be in a range of 4-5% this year and that EMD local currencies could post a high single digit return.
GIC_Fixed Income_3.9.18

Important Information

 

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of March 9, 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: March 9, 2018.

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Contributing Authors

Ken Taubes
Chief Investment Officer, US, Amundi Pioneer

 

Diego Franzin
Co-Head of Equities, Amundi

 

 

Ken Taubes
Executive Vice President,
Chief Investment Officer, US
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