Speaking at the event at South Lodge in West Sussex last week Amanda Stitt, investment director at Legg Mason, was upbeat on the asset class. “We are seeing yields come down but that doesn’t mean there is going to be a lack of opportunities in the bond market, particularly now there is quite a large divergence in monetary policy cycles between countries” she said. “You can take advantage of that as a bond manager particularly if you can play relative value within yield curves, as well as targeting opportunities in different sectors,” Stitt added.
“I think we are at the end of that long cycle but from a credit fund manager’s point of view the important point now is having the flexibility to manage the changes in the market,” said Fraser Lundie, co-head of Hermes Credit. Lundie agreed there are opportunities out there but said avoiding crowded trades is crucial in today’s credit market.
Robert Lee, a portfolio manager at Lord Abbett concurred with the consensus view that the ’30-year bull run’ has ended. “It’s mathematically very difficult if not impossible for US treasuries to fall much further for example,” he noted. “The more important question is whether it’s going to be a bear market for bonds and to that I think in the mid to long term, no, he added. “Liquidity is constrained but at the same time the buy-side base is much larger now,” Lee noted.
The members of the panel were in agreement that much of the opportunity still out there is in emerging markets. “We haven’t been in a 30 year bull market in emerging market bonds to be honest,” said Warren Hyland, fund manager at Muzinich & Co. “I like to looks at things in terms of real rates so if you look at Brazil it’s at 4.5% and Hungary is at 4%, so there is still some quite impressive yield you can find in emerging markets,” he said. “There is more depth to the emerging market investor base now as well,” he added.
“I very much favour emerging over developed market credit at the moment and there are opportunities to be found in areas that have not been so well loved before,” said Lundie. “For example if you are located in an emerging market an exporting to the US with revenues in dollars and costs in local currency things are looking good for you,” he explained.
Stitt agreed there are good investments to be made in emerging market credit but sees more balance between the relative attractiveness of emerging and developed market credit. “I think there is a misconception that rising interest rate environments are always bad for developed world bonds but in my opinion it depends whether it is priced in or not,” she said. “Last year it wasn’t priced in then we had the taper tantrum so it became priced in suddenly and markets responded aggressively but in a rising rate environment without further shocks, particularly when there is volatility in the yield curve you have a lot of opportunity to make money still,” she added.
In terms of the key dangers to watch for, the panel pointed to any signs of deflation being the red flag, rather than an uptick in inflation.
“The inflation/deflation question is the most important thing for bond investors in the US and arguably globally as well,” said Lee. “If the Fed or other central banks take the punch bowl away from the party too early there could be deflation,” he added.
“Rates will be lower for longer in the US as they have a dovish Fed, and deflation is the big fear not inflation,” said Stitt. Lundie also cited deflation as the biggest concern for credit investors.
