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Alphorum: pragmatic optimism in fixed income

Agence SAND

In the second issue of Alphorum, our quarterly collation of alpha-seeking views within the global fixed-income universe, we focus on the importance of harnessing both pragmatic optimism and healthy pessimism to adapt to changing market conditions.

The value of realism

With high vaccination rates and economic stimulus supporting growth in key markets, for optimists the future looks bright. Pessimists, meanwhile, will expect structural inflation to erode returns, and new Covid-19 variants to trigger further lockdowns. We prefer to be realists. That means having a constructive view on growth and being alert to the risk of higher inflation, but not alarmed. Overall, we see the current price inflation as transitory – though perhaps not quite as transitory as initially hoped – and believe the growth concerns expressed by the market in early July have brought balance to the consensus view.

Taper tantrum – or tango?

Fed Chair Jerome Powell’s carefully hedged comments on ‘talking about talking about’ scaling back the central bank’s $120bn per month bond purchasing programme have had some market participants harking back to the 2013 taper tantrum. However, we expect more of a risk-off-then-rally dance between central banks and markets than a major bust-up. Given this backdrop, we favour spread over duration risk.

Harnessing optimism – and pessimism

With central banks keeping interest rates low, investors are having to search harder than ever for yield, pushing up valuations across the fixed-income universe. At some point the music will inevitably stop, exposing those issuers with weaker fundamentals.

Given the asymmetry in upside/downside risk, we recognise the potential benefits of moving down the ratings and capital structure to harness carry. However, we stress the need to assess both the quality of a company’s business model and its approach to sustainability. We believe the market is failing to price in these factors – something our internal optimist views as an opportunity.

Market perspectives

In Alphorum, we provide our views of the risks and opportunities in major fixed-income markets worldwide, from developed and emerging-world sovereign bonds to corporate credit, and perspectives on sustainability. Read our overview of each market below, or download the full issue using the button provided.

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