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Jupiter's Bezalel: the most compelling bond opportunities
by Ariel Bezalel on Jan 02, 2014 at 14:32
While this was largely expected by the market, a further acceleration of growth in the UK economy at a time when the Fed is withdrawing stimulus may cause headaches for Mark Carney and push UK government bond yields higher.
In Europe there is mounting evidence that the economy is bottoming out and we are now in a situation where growth is not great anywhere, but growth is everywhere.
Although mindful of the difficulties the European Central Bank (ECB) faces in addressing the economic divide between Germany and the region’s weaker economies, we are encouraged by efforts (such as the bank asset quality review) to boost confidence and ultimately promote credit growth in the peripheral economies. We also believe the ECB may be forced towards more unorthodox policies should the shift in the Fed’s stance force interest rates higher in the region.
The best opportunities
In terms of strategy, we continue to hold the view that European high yield bonds present some of the most compelling opportunities available for investors in fixed income.
The region is enjoying low default rates, companies continue to focus on repairing balance sheets, the economic backdrop is stabilising and interest rates are likely to remain low for a prolonged period. These conditions contrast with those in the US where companies are more confident and therefore more willing to take on debt.
In terms of specific sector opportunities, banks are in the midst of a multi-year deleveraging process which could see them revert back to utility-style businesses in the world of fixed income. This is providing opportunities for bond investors, in our view.
Other areas of interest include oil rig financing, debt recovery businesses and pub securitisation. We are also seeing new opportunities in Greece, Spain and Ireland for investment in corporate and sovereign bonds.
While these opportunities are certainly cause for optimism, it is important not to be complacent.
We are taking particular care to manage risks associated with changing interest rate expectations. At around 2 years, the fund’s duration (sensitivity to interest rates) is relatively low. In the event that economic data in the US (and elsewhere) surprises significantly to the upside, we may look to take further measures to seek to defend the fund, although this cannot be guaranteed.
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On the road
on Mar 07, 2014 at 13:36