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Vontobel bond chiefs: corporate credit and EM hot spots

Vontobel bond chiefs: corporate credit and EM hot spots

The key strategy for bond investors in 2017 is to remain agnostic to convictions and an ability to change opinions quickly.

That is according to Ludovic Colin, head of global flexible bonds at Vontobel, who shared this view in the firm’s latest fixed income outlook.

'Derivatives are excellent for this kind of situation, and fixed income investors need to increasingly take them into consideration,' he said.

'Options specifically allow you to limit the downside when markets go against you and correspondingly optimise the upside when the market goes in your favour.'

Colin’s team doesn’t see the end of a 30-year bull market for bonds and instead said equity valuations approaching the end of cycle mode.

'We have an 8% recovery in the cycle in the US. Mr Trump is probably going to add two-to-three years of extra growth, but if it doesn’t go to plan, then we start to have a slowdown earlier than discounted by the markets.'

Credit view

In terms of credit, Mondher Bettaieb, head of corporate bonds at the firm, said banking, energy and construction sectors are going to be beneficiaries in the US market.

He added that new US corporate bond issuance in 2017 is expected to be lower than the record-breaking levels seen last year.

‘Large M&A transaction levels are slowing, and cash is expected to be repatriated from Europe to the US, which is supportive news for credit spreads.’

He said Asian and European investors are expected to continue buying US bonds, as those might have more attractive yield levels.

‘For bond investors looking for higher coupons and spread-tightening potential with limited volatility, US corporates particularly in the mid-yield segment (rated A to BBB) offer a sweet spot. ‘

When it comes to high yield bonds, Bettaieb is also positive, as default rates are forecasted to stay at or below long-term averages. He said to focus on European names despite yields seeming lower than those in the US.

‘With US Treasury yields around 240 basis points higher than Bunds, hedging any currency exposure pretty much eliminates most of the difference in yields.’ 

He added that duration in high yield is also lower in Europe than in the US, and Europe has more BB-rated bonds and less B-rated than the US.

Emerging markets outlook

The firm's head of emerging markets bonds, Luc D’Hooge, said his team is focusing on EM hard-currency debt and expects growth from Latin America, in particular Brazil and Argentina.

D'Hooge also likes Indonesia due to beneficial structural reforms and is keeping a close eye on the upcoming local elections in 2017.

'The election in Jakarta will be important to see if President Joko Widodo’s close collaborators win there; it will be a test vote on the president himself.'

D'Hooge is taking advantage of euro-denominated bonds that deliver a spread pick up 40-50% higher than on the US dollar equivalent bonds.

He is also positive on Mexico, as it is attractively priced based on its potentially big exposure to Trump’s policies. His team is invested in Mexico’s external debt with a special focus on long-maturity paper in euros and pound sterling.

‘At the very long end, several century bonds offer a 3.8% pick-up over the risk-free rate and thanks to that, the interest rate risk (modified duration) is lower than for the German 30-year Bund. That’s an anomaly for a mixed A/BBB issuer.’

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