Bond investors should prepare for an uptick in volatility, but this doesn’t necessarily mean they should start shedding peripheral European sovereigns, BlueBay Asset Management’s David Riley has said.
The firm’s head of credit strategy told Citywire Selector there is likely to be increased noise in Europe as the European Central Bank (ECB) moves onto a path which could end its three years of supportive policy by the end of 2018.
However, Riley said the idea that this would immediately translate into peripheral European problems is overstated and, in fact, could lead investors to miss out on attractive yields in increasingly resilient markets.
‘I do think that the peripheral sovereign story within Europe remains a positive one and quite strong. We are expecting the sovereign risk spreads to diminish even further even as we see the ECB bringing QE to an end.
‘The reason being that one of the big positive surprises through 2017 carrying into 2018 is Europe is on fire in terms of growth, so growth is consistently exceeding expectations.
‘Fear around eurozone systemic risk is receding, not just because of the French election but with the Italian election coming up, we have seen the populist parties already start to back away from this notion of potentially debating their membership of the Europe.’
Riley said that rather than focusing on potential peripheral weakness, bond investors would be better served to look at how their portfolios would respond to a changing rate environment, rather than a reduction in stimulus.
‘What is going to be really interesting for bond markets in Europe in particular is not only that the ECB bond-buying comes to an end towards the end of the year but what it starts signalling in terms of how soon and how quickly it starts bringing rates out of negative territory.
‘I think it is going to be a bumpier for investors in 2018 than it was in 2017, which was great in terms of having things go up, but it is going to be a great place to invest.’
These comments are part of a longer video interview with David Riley to be published next week.