NEW YORK: Convinced the Federal Reserve (Fed) pivot is finally in, some investors are on the hunt for the juiciest yields fixed income has to offer.
They’re finding creative ways to stoke returns, buying Austria’s century bonds, New Zealand’s quasi-sovereign securities, the debt of supranationals and Pakistan’s hard-currency notes.
Here are some of the niche trades fund managers at TCW Group Inc, Fidelity International Ltd, MFS Investment Management and others are eyeing.
Portfolio diversification
MFS Investment Management and Vontobel Asset Management AG are bullish on debt issued by supranationals – top-rated organisations backed by multiple countries to promote specific policy objectives.
“People are digging for value opportunities in places that are not that obvious,” Pilar Gomez-Bravo, co-chief investment officer of fixed income at MFS Investment Management, said in an interview.
Notes from the European Union and the European Financial Stabilisation Mechanism offer a cheap relative value trade as Europe inches closer to recession, she said.
Supranationals tend to have well-diversified portfolios and give investors exposure to countries that are not directly accessible via euro bonds, according to Vontobel Asset’s Carlos de Sousa.
He likes those operating in Sub-Saharan Africa, such as Africa Finance Corp and Banque Ouest Africaine de Developpement.
Interest-rate sensitive
Ninety One UK Ltd prefers “safer” positions to hold through the next year when the rate cycle turns.
New Zealand’s Local Government Funding Agency securities fit the bill, according to John Stopford, head of multi-asset income at the London-based money manager.
The AAA and AA+ rated notes are one of the largest sovereign bond exposures after Treasuries for the asset manager.
“They command a premium of as much as 55 basis points to the local government bond, which will benefit as yields come down globally.
“There isn’t a huge cost in holding those bonds in terms of negative carry so we think it’s a pretty good story.”
Distressed nation debt
TCW Group and Mackay Shields recommend the hard currency debt of Pakistan, which secured a deal with the International Monetary Fund to avoid a sovereign default.
The dollar-bond maturing in 2024 rallied the most since June.
The longer-dated notes have further upside as borrowing costs could fall following the Fed’s signalling of a pivot, according to David Loevinger, a managing director in the emerging markets group at TCW in New York.
“If Pakistan can eventually get access to markets, they can – even if fundamentals don’t change – borrow to pay off debt coming due.”
Price recovery
Fidelity International is adding duration with an Austrian bond maturing in 2120, nearly a century from now. Its Global Multi-Asset Growth & Income fund bought the securities in October at about 35 US cents to the euro, a level it may not test again, according to Singapore-based portfolio manager George Efstathopoulos.
“It can probably double if we start seeing more evidence of the global economy moving toward a recession,” he said.
European growth versus rest of the world may also be weaker, likely making the bet rewarding, Efstathopoulos said.
The fund may top up the position if prices continue to recover.
Contrarian trade
Bank of America Corp is recommending buying a basket of five-year credit default swaps across emerging markets to prepare for the worst – a shift in the narrative toward a hard landing.
Spreads have been tight for sovereigns, meaning the market has not been buying much protection, according to Adarsh Sinha, co-head of Asia Pacific foreign-exchange and rates strategy in Hong Kong.
“If everyone is wrong on US rates and the dollar, and emerging markets selloff where do you get the biggest bang for your buck? It’s an option trade where you get paid on the worst-performing option.” — Bloomberg
