Government bonds have recovered somewhat from their sell-off in the early part of the year, as expectations of delivery on president Trump’s wavered and faster rate rising behaviour from the Federal Reserve were curbed.
However, Hodges thinks the risk rally has still got legs, while sovereign bond yields “look unattractive in many cases.”
“Risky assets have already priced in a great deal of stimulus, but the risk rally may have further to run,” Hodges stated.
“Against this, we have to consider valuations, which look poor across many asset classes.
“The upcoming elections in major markets impose the risk of a lurch towards more extreme politics across the European Union. This has been reflected in sovereign bond yields, which look unattractive in many cases.”
Not all riskier assets look appealing to Hodges. The relatively dicier US high yield sector remains a “concern” on the back of its “heavy oil exposure.”
And Hodges’ Nomura Global Dynamic Bond fund “continues to have cash to deploy” and some credit hedging in place to combat further downside volatility, in addition to augmenting his options on US duration and reduce holdings in the physical bond portfolio.
At this stage, his preference is for select convertible bonds issued by Japanese companies, citing their ability to “offer significant potential upside in some cases.”
