Defensive Plays

Tuesday 30 October 2018

Fixed income, Investment Talks

Overall assessment

We expect that volatility will remain in place in the next weeks due to trade tensions, US midterm elections, higher oil prices, CB policy noise, and uncertainty linked to the Italian fiscal policy. We believe investors should stay defensive in fixed income. In particular, the case for a strong short duration stance is receding globally and especially in the US, where 10Y Treasury bond yields have increased, reaching seven-year highs. Hence, we think that adding some duration exposure could be beneficial in a maturing economic and financial cycle. At the same time, at this point of the cycle, as we expect tighter financial conditions ahead, investors should reduce credit risk and be extremely focused on the quality of securities and liquidity management. Divergences and fragmentation will likely persist: in DM, with strong economic data in the US vs deceleration in the rest of the world in the coming months; and in EM, given various levels of external vulnerability. This environment will remain favourable to actively playing relative value trades with a global approach.  

Developed Market Government Bonds

The major contributor to the rise in US yields has not been inflation (ie, that the market thinks the Fed is behind the curve), but rather real GDP growth as well as an increased term premium. Real growth estimates have risen with the recent strong numbers received on non-manufacturing ISM and non-farm payrolls. Fed Chairman Powell’s somewhat more hawkish comments further spooked markets. A determined and data dependent Fed willing to avoid any economic overheating will, in our view, put upward pressure on US bond yields, but we see only temporary overshooting and limited structural upside from current levels. In the Eurozone, uncertainty related to the Italian budget situation is likely to continue to weigh on Italian bond risk premia and marginally also on other peripheral bonds, on which we have now moved to a ‘neutral’ view.


We continue to recommend a strong focus on quality in credit. In Europe, the financial sector continues to offer some opportunities, as does the subordinated space. In the US investment grade space, our preference is for banks, insurance and the energy sector. We also continue to favour loans as a source of a steady stream of returns compared to high yield bonds.

Emerging Market Bonds

With a strong USD and rising US rates, EM bonds remain under pressure. We see limited room for material spread compression in the short term, after the rebound in September. As country specific stories move out of the spotlight, amid economic and policy adjustments, the asset class can offer attractive opportunities for income and carry with a long term investment horizon, but volatility is likely to remain quite elevated. In our view, selective EM dollar-denominated bonds can offer investors yield premia without exposure to exchange rate and inflation pressures. Our preference is for the energy sector, given the recent surge in oil prices, and for the GCC area* to benefit from inclusion in the main indexes.


We are still positive on the USD, as global growth and rising inflation are supportive; but cautious on the GBP in the absence of agreement on Brexit and EM currencies vulnerable to a trade war.

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

Important Information

Diversification does not guarantee a profit or protect against a loss. 

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