Reassessing duration views

Monday 08 October 2018

Fixed income, Investment Talks

Overall assessment

While global economic fundamentals remain sound, with some signs of deceleration, uncertainty will continue to dominate based on upcoming elections, CB actions and trade discussions. Core government yields (US, Germany) will likely remain range-bound, as demand for “safe” assets should counterbalance the upward rate pressure driven by the economic backdrop. We think it is key that investors focus on quality and liquidity across the board while seeking opportunities that may emerge after a period of noise -- for example, in selective EM bonds.

Developed Market Government Bonds

At current yield levels and given market expectations (Fed hikes well priced into the market), we think the case for a short duration bias on US Treasuries is receding while we keep a short duration view on Europe and Japan. Within Europe, we continue to expect the yield differential between 5Y and 30Y bonds to decrease (flattening), as the curve appears too steep at current levels. At the country level, we see tactical opportunities in selective peripheral countries (eg, Spain and Portugal). 

Developed Market Corporate Bonds

While the near-term growth outlook appears supportive, future Fed policy considerations and market valuations support cautious positioning on credit, with a focus on liquidity. Opportunities should be played across and within sectors. In the US investment-grade space, we like banking, insurance and energy names, given their valuations and credit cycle positioning. We are more cautious in basic materials and tech on valuations and on pharma due to concerns about the business model. Loans also continue to offer opportunities against a backdrop of strong fundamentals, rising profits and low defaults. In Europe, we also keep a defensive stance with a focus on short-term issuance, and we continue to seek selective opportunities in financial subordinated bonds.

Emerging Market Bonds

We expect volatility to remain high as we move towards US mid-term elections, which could drive some hostile talks on the trades/tariffs/ sanctions front. The weakening in the risk sentiment at a time of tightening liquidity has resulted in some EM being caught in the selloff and as a consequence now offering very interesting valuations. An example is Mexico, where we think the local sovereign debt shows compelling value, with an almost 8% yield on the 10Y bond in LC for an investment-grade country (as of 18 /9/18). We think Mexico is likely to enjoy a period of calm before year-end, when the president elect will take over, while NAFTA headlines are softening. In contrast, we are cautious on Turkey local debt. Recent lira weakness has been impacting inflation expectations, and although the CB finally delivered a rate hike, the focus will be on upcoming budget, with the expectation of meaningful fiscal policy tightening.

FX

Ongoing and rising concerns on trade disputes continue to support the USD in the short term and to add volatility for EM currencies, where local politics are also contributing to uncertainty. We are positive on the USD, as global growth and rising inflation are supportive. On EM, we remain cautious on EM Asia currencies, which are more vulnerable to trade wars, and on Brazil, due to approaching elections.

Contributing Authors

Ken Taubes
 Chief Investment Officer, US,
Amundi Pioneer

Yerlan Syzdykov
Head of Emerging Markets,
Amundi

Eric Brard
Head of Fixed Income,
Amundi

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 8, 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.