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Global Investment Views: Fixed Income - May 2018

Perspectives» |

May 3, 2018

Divergent Forces at Play Call for Higher Flexibility

A pause in the upward trend in yields seems driven more by a flight to quality than a change in fundamentals. The growth outlook is still strong, even given a peak of some economic indicators in March. In our view, this is a sign of a stabilization of growth at a high level while the cycle is ageing, and not yet a change in the economic picture. In the US, pro-cyclical fiscal policies in a phase of upbeat sentiment are increasing the risk of inflation acceleration. Four out of six US inflation drivers (retail and producer price, labor costs and commodity prices) are moving into the “heating up” zone. With divergent forces at play, we think investors should maintain a flexible approach amid rapidly evolving market conditions and diversify their sources of returns. Credit markets are still a valuable source of carry, as well as EM debt. Inflation protection securities are also important, along with currency strategies that bring no credit, duration and liquidity risk.


DM government bonds

Core government bonds remain unattractive across the board. Gradualism is the cornerstone of central bank strategies and communication, with widening divergences between the more hawkish Federal Reserve Board (Fed) and the more dovish European Central Bank (ECB). Overall, we continue to believe that the strong commitment to removing excessive monetary accommodation is intact, with the risk of a more aggressive Fed in 2018, if geopolitical risks do not deteriorate. A short duration bias is still appropriate, especially in the Eurozone and Japan. In the US, the combined effect of flight to quality on the long end and pressure on short-term maturities is keeping the yield curve extremely flat, with 2-10Y spread close to the pre-crisis level. Additional pressure on US yields could come from the US fiscal expansion and the upward trend of the oil price.

 

DM corporate bonds

Credit spreads widened as a consequence of risk-on/risk-off dynamics, but the market remains relatively resilient, as fundamentals are still good, with no major imbalances. In the US, the recent spread move opened opportunities to selectively increase exposure to IG credit in some “over-adjusted” segments or sectors, especially those that benefit from higher oil prices. In HY, the default outlook is still benign across the board, and spread widening can be seen as a tactical play in search of additional sources of return. In a more volatile phase, investors should focus on enhancing diversification (loans, catastrophe bonds, residential mortgage-backed securities) A concentration on security selection will also be increasingly important.

 

EM Bonds

Idiosyncratic stories are at the forefront. Sanctions are affecting Russian assets, but risk of broad contagion is limited, and tactical opportunities may open at more reasonable prices. The faster-than-expected inclusion of China’s bonds into the Bloomberg Global Aggregate Index has been welcomed by investors and the country as a sign of further liberalization of Chinese financial markets. Renminbi appreciation vs the USD also reflects an improvement in sentiment. Positive developments are apparent in Latam (Brazil, Colombia and Mexico) while Turkey and India may be under pressure due to higher oil prices. Despite a modest spread widening (EMBI index), the asset class retains its appeal for carry reasons, with a strong focus on country/security selection.

 

FX

Downward pressure on USD vs G10 currencies should remain in place in the medium term. The JPY is well supported due to its safe-haven asset status. We keep our negative view on sterling.
GIC_Fixed Income_5.1.18

Important Information

 

Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management (“Amundi Pioneer”) and is as of April 30, 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 30, 2018.

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Contributing Authors

Ken Taubes
Chief Investment Officer, US, Amundi Pioneer

 

Eric Brard
Head of Fixed Income, Amundi

 

 

Mauro Ratto
Head of Emerging Markets, Amundi

 

Ken Taubes
Executive Vice President,
Chief Investment Officer, US
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