The hunt for yield continued to dominate fixed income investors' agendas in 2016, with the appetite for high yield and EMD on the rise over the course of the year.
Asset allocators from across the globe said the bond bubble is yet to burst, and committed to upping exposure to high yield bonds over the next six months.
‘In credit, our focus is on short-dated paper with decent carry alongside ‘special situations’ where we see the possibility of significant capital gains.’
‘We are also allocating to emerging markets such as India and Argentina, two countries where the economic and political backdrop look favourable and where we believe it is possible to capture attractive yields without compromising on credit quality.’
Financials in focus
‘Our largest allocation is in non-agency RMBS. We have also been overweight US TIPS since before the US election and look set to maintain this position in 2017.’
‘In Europe, we’re long European high yield because the ECB remains accommodative and the region is at an earlier stage in the credit cycle.’
Jonsson said the team moved from a long to neutral position in emerging markets before the US election, a position he said the fund will continue to maintain.
EMs still attractive
SYZ’s vice CIO and co-head of multi-asset, Hartwig Kos, said the UK and Germany still remain appealing.
‘Within Western sovereign bond markets the UK and Germany look somewhat more attractive. Italy, which has already seen significant adjustment, still carries a high degree tail risk given the scale of defeat for the government in the recent referendum, raising the risk of further political instability.’
‘Within the different bond segments, emerging market (EM) hard currency bonds look somewhat more attractive.’
Kos said this segment – especially Mexico, South Africa and Turkey - has suffered meaningfully due to a strengthening US dollar and the fear of Donald Trump imposing trade restrictions once inaugurated.
Reflation on the up
‘Core inflation is likely to drift higher in the US, although remaining well anchored as the strength of the US dollar is maintained. Headline inflation measures will be sensitive to the base effect of energy prices, most likely felt in the first quarter, and this may lead to some volatility at the headline level.’
‘Wage pressures are expected to rise moderately across developed economies as labour market conditions have tightened progressively over the past couple of years, especially in the US.’
However, Absolon said hopes of a coordinated global fiscal policy pact remain a pipedream. He added the ballooning budget deficit will keep the UK timid about freezing the fiscal purse strings, as eurozone governments show a lack of ambition.