UK - Corporate bonds and mortgage-backed securities are poised to gain from an impending economic recovery, spurred by interest rate cuts in the US.
During the global economic weakness, fixed income markets behaved as expected - yields have fallen dramatically across all markets - but bonds have been supported a prolonged period of low inflation.
So far investors have sought shelter in fixed income assets such as high quality government bonds as appetites for equities wane and fears around potential defaults from “risky” corporate bonds set in.
But now Schroder Investment Management, who have been bearish on corporate bonds since the beginning of the year, is pushing for a more aggressive investment.
“Frankly, given these moves, I would say that this is one of the best opportunities to sell government bonds and buy corporates that I have seen in over 20 years in the industry. There is no doubt that the earnings environment is difficult for a lot of companies. But those investors with confidence in their credit analysis should be able to steer through this challenging environment successfully,” said Robert Michele, global head of fixed income.
Schroders have now added mostly ‘A’-rated bonds to its portfolio, having moved 10% out of the US into Europe.
“We felt that the sharp rally in US Treasuries was accelerated by buying from investors such as mortgage-backed securities issuers who wanted to extend the level of duration in their portfolios.
“As volatility continues to diminish in markets, yields in Europe and the US should converge,” added Michele.
“The central banks have done quite a bit to reflate the global economy, and our current strategy reflects our expectations that we should see the benefits of the their action materialising over the coming quarters.”
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