Core Appeal, but not Time to be Overly Defensive

Wednesday 05 September 2018

Fixed income, Investment Talks

Overall assessment

The appeal for core bonds continues to be caused by geopolitical tensions and erupting idiosyncratic stories in EM. The Turkish crisis is the latest in signalling that conditions have become tougher for EM debt.Selectivity is the name of the game to limit the effects of country-specific vulnerabilities and imbalances. As the tide that lifts all the boats, namely, ultra-accommodative monetary policy, and more importantly, it is necessary to continue to explore opportunities in credit, with a more cautious attitude in the areas of the market that benefit most from the buyers of last resort (CBs), notably low quality / low liquidity bonds. We are still on the job, but especially in the US, investors should consider their shorts as we move closer to a neutral rate.

Developed Market Government Bonds

The 10Y German bond yield remains anchored to the year-to-date lows, benefiting from the flight to quality effect and a crisis response (with a potential impact on European banks) and tensions on Italian govies. The next weeks will be critical for the Italian budget and will remain high. The Italy-Spain ECB's toolkit to reduce contagion risk. We do not believe that these frictions will impact the ECB's announced plans. Eurozone CPI is close to CB's target and economic conditions remain sound, despite some challenges. Hence, in the tug of war of idiosyncratic stories and sound economic conditions, we expect to fall into the current trading range.

Developed Market corporate bonds

We have taken a more conservative and selective approach on credit in recent months, even if we do not think it is yet time to be too defensive.Investors have begun to compete in the global economic activity, with less supportive technical conditions and diverging fundamentals between the US and Europe. EU companies continue to be very cautious, with low leverage and high cash ratios. US companies remain confident in the economic cycle, increasing leverage and decreasing their cash ratios. 

We prefer maturities / floating rates and higher quality bonds.Opportunities are rising in subordinated bonds in Europe, but a focus on selectivity is paramount.

Emerging Market Bonds

We remain cautious at the moment, as some political noise is expected ahead of the Brazilian elections in October. Our preference is for hard currency bonds over local currencies, the risk-off environment and EM FX fragilities versus the USD. Our favorites are Mexico, Serbia (good fundamentals and attractive risk / reward) and Argentina (after the IMF support). We are cautious on Turkey (LC). We do not expect US sanctions on Russian sovereign debt, but volatility will remain high.Through the year-end, when we expect easing trade tensions and a stabilization of the USD, EM bonds will be back in focus, with attractive yield premiums for long-term investors.


The USD should remain well supported by the US economy's strengths and divergences. However, US elections in November could weigh on the greenback, giving some relief to EM FX.

Contributing Authors

Ken Taubes
 Chief Investment Officer, US,
Amundi Pioneer

Yerlan Syzdykov
Head of Emerging Markets,

Eric Brard
Head of Fixed Income,

For the complete Global Investment Views   Read here

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