Although the situation in the bond market has become clearer, with the reduced political risk in Europe and the US Federal Reserve’s relative openness about its intentions, investors should not ignore interest-rate risk, because bond yields are still extremely low, particularly in Europe. In the circumstances, active management is vital to protect portfolios against yields rising – even gradually – in the wake of US movements.
Investors need to look beyond the “euro aggregate” universe to find alternatives offering greater protection. The current situation requires a holistic, unconstrained approach to the bond markets.
As in the last few months, we have several preferred investment themes. US credit remains attractively valued compared with its European equivalent. It is true that renewed uncertainty about the direction of oil prices could prevent US corporate bond prices from rallying. Oil prices are currently moving within a range of $42-55, similar to levels seen in 2015 and 2016. However, today’s situation is different: back then, the ISM index was at 48 and there was concern that the USA would fall back into recession, putting significant downward pressure on oil prices. Today, the health of the US economy is no longer in question. The current low level of oil prices is due solely to the inability of oil-producing countries to agree to adjust production.
Similarly, the US high-yield segment, where CDS spreads are currently 70 basis points higher than their 5-year average on a carry and roll-down basis, is still offering value. Investors can optimise their income profile by investing in the US high-yield segment via derivatives like CDSs. High-yield CDSs remain cheap relative to the prices of their underlying bonds.
Finally, subordinated bank debt also remains attractive, provided that investments are selected carefully. The recent events with Banco Popolare and the Veneto region banks means that investors should focus on systemically important banks, to the extent that these larger institutions have already cleaned up their balance sheets and restructured their businesses. By taking a flexible approach to the bond markets, these investment ideas help to reduce portfolio risk.
Christel Rendu de Lint – Head of Global & Absolute Fixed Income – Union Bancaire Privée (UBP)