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Our clients are beginning to feel reasonably comfortable building two-year portfolios with top-quality credit and 4-5% returns,” recognize Ignacio Sicre Zamanillo, Director of Fixed Income at Santander Private Banking Spain. Some statements that could summarize the general feeling of the sector in which, seeing the increases shown by bond yields, it may be time to start building a portfolio in fixed income.

We have spent several months in which the situation of the fixed income market has become complicated, the virulence with which the bonds have put in price the rise in rates of the central banks has generated a movement in the curves never seen before. In fact, the levels of declines that have been seen in the bond market have not been seen in 30 years. The moment is delicate, but the difference with respect to the situation we had 10-11 months ago is that “Now we have a cushion that can cushion us from possible amplitudes in the yield curve. If we go to the most defensive part of the Investment Grade debt, the IRR is above 4% and, if the FED stops its process of raising rates at 4.5%-5%, we already have something that cushions the falls ”ensures Fernando Fernández – Bravo, Head of Sales Active Iberia at Invesco.

The underlying question is whether the worst in this market is over. And here, the opinion of experts diverges. “We don’t know if the worst is over, inflation and central banks will mark it a lot, but we do believe that we have been through much of the hardest part. And that it is also worth making a bond portfolio with what fixed income pays”, ensures Ricardo Comín, Executive Director & Deputy Country Head Iberia at Vontobel Asset Management.

For its part, Alfonso Sánchez, Business Development Director at Carmignac think that possibly “We haven’t seen the worst. Last year the Central Banks told us that inflation was transitory, less than three months ago they said that inflation would be 6.8% and now they say 8.1%. We have no idea what it will take to control prices, but I think Jerome Powell has (Paul) Volcker in mind who, although the situation back then doesn’t look much like it does today, had to cause two recessions because he put his foot down throttle too soon. And he took the rates to 19% with an inflation of 10%”.

Perhaps because we are not aware of 1) to what levels inflation will go and 2) at what interest rate levels central banks will be able to drive prices, it is important to look at duration. Especially when it comes to the fact that monetary institutions will be forced to back down on their interest rate hike policy when the economy enters a recession. Elena Delfino, Head of Spain of Aegon AM support focus currently “in the shortest part of the duration, 2-3 years, with an eye on Investment grade credit. In high yield we are quite attracted to the 8% yield, as we have seen it very few times. The part of the carry with very good coupons with a maturity that is not close and in companies without much debt is very interesting.

In this sense, the expert from Santander Private Banking acknowledges that in the construction of the portfolio they began with durations of two years with maximum credit quality and, “As we understand that the rate levels may be closer to the arrival level, we lengthen to four years.” A strategy, in terms of duration, shared by the Invesco expert who acknowledges “having pecked something in financials, in subordinated debt, although we are more negative in high yield and cautious in hybrid bonds. We assume more duration and, in the financial part, it is where we add more risk”.

At a time when we see German bond yields above 2%, compared to the 3.5% offered by US debt or the 4% offered by the debt of a region like Italy, it is worth asking whether government bonds, so reviled in recent years, they can be one more asset in the portfolios. Óscar Esteban, Sales Director of Fidelity International admits German government bonds as interesting “Because they are discounting the rate hike a lot and, when the ECB changes the rhetoric, the IRRs of the bonds will fall and we will benefit from the price. But we prefer to leave peripheral bonds aside because in this rate situation they may have a liquidity problem”. And in the US, continues this expert, there are data that show a slowdown in the real estate sector that will lead to a change in rhetoric with falls in yields and the consequent benefit in price.

The Vontobel expert assures that, through a flexible fixed income fund, they have an important part in liquidity and “They maintain short durations. It is true that we see things that are not attracting much attention with interesting returns that perhaps should not be disdained and in which it is worth taking the risk.

With a neutral duration, the only one they have is in the credit part, from Carmignac they recognize being short in Germany, Italy, Spain, France… to adapt to an environment of higher interest rates for longer “Because the situation in Europe is completely different from the US, both because of inflation and because of the energy situation. What has made the ECB jump has been the flow of assets from the euro to the dollar. It is in a currency war against the US because you have to pay for the raw material (oil, the main generator of inflation) in dollars and that carry forces the euro not to depreciate much more. And this is a very dangerous drift.”


The increase in the yields of government bonds will bring with it the so-called “deposit war”. We are coming from a period at the financial level where anomalies such as negative rates have been generated in a large part of the sovereign bond curve and there have been investors (savers) who have not been able to choose their star product, which is deposits. “Standardization happens because we have a variety of products where the customer who is comfortable with this product can recover this alternative”, Sanchez admits. And in the management of the debt portfolio, where are the emerging countries? A type of asset that should not be disdained, but on which caution must be exercised and which makes it necessary to profile those clients who had slipped into these markets looking for yields. Fidelity’s expert sees an asset such as Chinese government bonds as interesting “who have endured well despite having economic difficulties”. And if you are looking for attractive IRRs, the Chinese high yield offers a return of 30%, because real estate makes up a lot of that index, and the Asian high yield has a return of 18%, “But you have to have the risk profile required to invest, which for many is the equivalent of investing in equities.”

In addition, from the rate carry, there is the possibility that the overvaluation of the dollar reached a turning point, which would especially benefit those currencies with a significant undervaluation such as the Mexican peso, points out Consuelo Blanco, Investment Strategy investment fund specialist.

reference: assetmanagers.estrategiasdeinversion.com

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