With interest rates reductions seemingly on the horizon and the full extent of the credit crunch not yet known, one of the hottest 2008 investor debates surrounds fixed income.
As uncertainty continues to encircle the sector, where do the experts expect to find fixed income opportunities?
F&C Strategic Bond fund manager Fatima Luis expects investment grade financials to offer the greatest prospects in the New Year, despite the fact the credit crisis problems are “far from over”.
"As banks need to recapitalise they will be willing to come to the bond markets at significant discounts and non-financials will find they need to do the same,” she says.
“Likewise, there are also opportunities to acquire the debt being fire-sold from collapsed hedge funds and SIVs in the secondary market.”
Royal London fixed interest head Jonathan Platt says government bond yields broadly reflect the firm’s pessimistic global growth scenario.
“Our assessment of fair value for ten year bond yields indicates that, over the next twelve months, there will be no capital appreciation from current levels in most of the major markets,” he says.
“The health of the global banking sector will be the main determinant of the returns of credit bonds relative to government securities.”
Platt says credit markets have re-priced to reflect the weaker economic scenario.
“Despite this unpromising background we believe that investment grade credit spreads more than compensate for the rise in default rates that we expect to see in the medium term,” he says.
“This is not the case in high yield markets where we believe that the yield compensation is insufficient relative to government and investment grade bonds.”
Santander fixed income chief Guillermo Hott believes second-half rally in US bond markets has left little more to gain next year, unless there is a “strong deterioration” in the macroeconomic situation during the next few months.
“We see Europe as a safer bet as the market is not pricing in the start of an easing cycle and we believe there is very little chance of further rate hikes in 2008,” he says.
“Volatility in the markets will remain high and government bonds will often overreact as a safe haven, but pull-backs will be buying opportunities going forward.
“We favour steepening trades when corrections take place as we anticipate lower short-term rates in the future.”
JPMorgan meanwhile is convinced the UK is the most attractive fixed income market.
“This may occur because the UK economy faces an unpleasant slowdown, or even a move into recession,” it says.
“Consider the chill winds swirling around the UK economy. First, the housing market is starting to correct, unwinding its severe overvaluation.
“Second, the UK household sector has a massive cash flow deficit, with the net financial balance at close to a record 6.2% of disposable income.
“Third, the Bank of England is presiding over a draconian monetary policy, where monetary conditions on our measure may be the tightest in over 10 years – and that is before we even include the effects of the credit crunch.”
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From 6 April 2019