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Global Investment Views: Fixed Income

Perspectives» |

January 8, 2018

Flexible and Active: Keywords for 2018

In 2018, we could see a transition in fixed income from the current phase, where predominant buyers (CB) are buying regardless of the level of yields and returns, to the future state in which investors will evaluate risk/return before buying, as in “normal” market conditions.


This transition will likely not be linear and will require agility in managing fixed income portfolios. While a very gradual normalization of monetary policies seems to be discounted by the market, any situation of inflation acceleration and CB behind the curve is not discounted, and could bring sharper and more painful adjustments in the market. In 2018, fixed income investors should embrace a flexible and active approach using all the levers to generate value: dynamic duration and credit exposure, inflation-linked bonds and moving, if possible, along the credit continuum.
GIC_Fixed Income_1.8.18

DM government bonds

Financial markets are still too complacent on CB policies. In the US, the Fed upgraded the economic outlook (GDP revision from 2.1% to 2.5% and unemployment from 4.1% to 3.9%) but did not change the expected rate trajectory. This further confirms our view that the Fed is behind the curve and we expect a faster pace of increase in rate in 2018, especially if the tax reform effects start to kick in. The curve has flattened significantly vs the summer. If markets continue to re-price Fed funds expectations, long-term yields will rebound from the current levels. We believe investors should maintain a short duration view on US government bond market. In the

 

Eurozone, the risk/reward profile is unattractive in core govies. So duration should remain short. Markets are very complacent on the euro short end part of the curve as the first hike is not priced in until end 2019. A re-pricing might lead to a flattening of the yield curve in 2018. We see opportunities in peripheral bonds. Inflation-linked bonds should also be considered. They could provide protection at a low cost should the market react nervously to CB movements, as they imply still very low break-even inflation. 

DM corporate bonds

An acceleration of economic growth remains supportive for the corporate sector, even though valuations are very tight. In the Eurozone we see value in the subordinated debt, both financials and non-financials, and high yield, but we are aware of idiosyncratic risk. Convertible bonds can be a source of diversification in fixed income. In US IG, the focus should be on financials and energy. Future sell-offs in HY could offer good buying opportunities, given strong underlying fundamentals. To mitigate credit risk, a focus on quality and liquidity will be crucial.

EM Bonds

EM spreads are tight and total return/flows expectations are very much a function of US treasuries. A key risk would be a 10Y UST reaching the critical threshold of 3.5%. However, this is not our base scenario. We expect 4-5% returns for EM debt in hard currencies and 7-8% in local currencies in 2018. EM bonds in 2018 will likely be an income story, more than a story of yield compression, for global fixed income.

Important Information

 

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

 

Date of First Use: January 8, 2018.

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Contributing Authors

Ken Taubes
CIO of US Investment Management, 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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