Fixed income is an unloved asset class at the moment. Yet it is becoming more interesting. This year has again reminded us that betting on higher government bond yields is a poor quality trade most of the time and that having long duration serves an important purpose in a bond or multi-asset strategy. More interestingly, value opportunities are starting to open up. For some of those, look east. Asia has underperformed and the highest beta part of the Asian bond market – Chinese high yield – has really underperformed. Double digit yields are out there. More generally credit is cheaper than it was, although not quite at the same relative value levels as the last great buying opportunity in 2016. Maybe that is right because the global economy is stronger today. Yes there is a lot of political noise. Yes that could impact on economic activity at some point. Then again, it might just turn out to be noise. Reasonably strong fundamentals and sentiment driven cheaper valuations might be the story for the second half of the year. Watch Asian high yield as a leading indicator.
- On an outright basis, government bond yields still look too low against what remains a strong growth backdrop. So going forward it is hard to be super bullish on government bonds as a standalone investment strategy and my own view is that yields will tend to remain in well-defined ranges. Away from rates, the bond market is becoming a bit more interesting. There are pockets of value opening up.
- Now you might think it is hard to be bullish when populism abounds and you don’t quite know whether certain global leaders are going to hug each other or stab each other in the back. As investors, it is hard to see through all the bluster because there is a risk that, at some point down the road, bluster becomes policy and policy has real economic effects. What we can say is that fiscal policy in the US has boosted growth there and so far, and on the basis of what might happen with tariffs, the impact of protectionism is relatively muted in terms of prospective growth. But the unknowns are considerable.
- The last good opportunity to buy credit was in early 2016. On a relative value basis – comparing credit assets to risk-free assets – credit is generally not as cheap as it was back then. However, on an outright yield basis some sectors are much cheaper than they were in early 2016 – US investment grade credit, for example, today has a yield-to-worst of 4.1% compared to just above 3.60% at the start of 2016.