What we think
The current environment of low or negative (real) yields is likely to continue in parts of the corporate space as well as developed market government bonds. Investors may need to look for income elsewhere, and acceptance of risk will be a prerequisite for positive absolute performance.
Emerging market (EM) bonds have been an investment focus of ours for several years and, with inflation hovering near historical lows, EM real yields are materially higher than developed market real yields (for example in Germany or the U.S.).
Within EM, the natural focus has been on hard currency sovereign debt, but EM corporates may be equally or even more attractive. At the same time, the focus has tended to be on USD-denominated EM corporate bonds, but those denominated in other hard currencies (e.g. EUR) may also appeal.
In developed markets, we see opportunities in U.S. Investment Grade and the Eurozone crossover segment. Eurozone sovereigns are not appealing but will present some tactical opportunities during the year. Meanwhile, U.S. Treasuries may have more sustained use.
What we suggest
Incorporate corporates into EM bond investments
- EM corporate bonds compare favourably on various measures with their developed market peers.
Only act opportunistically in Europe
- With the ECB being a large buyer of bonds again in 2020, the hunt for yield will continue and even lowerrated European bonds will trade on negative yields. However, we see opportunities in the Eurozone crossover segment (i.e. lower-rated investment grade, higher-rated high yield).
U.S. Treasuries keep their allure
- U.S. Treasuries still appeal as a source of positive nominal yields.
