Neuberger Berman co-head of global fixed income Jon Jonsson expects negative inflation pressure to continue to weigh on Europe, the UK and US over the coming months.
Jonsson, who joined the group from JP Morgan in August, launched the NB Global Bond Absolute Return Fund in September with a negative duration, and is keeping an eye on falling inflation indicators across all three regions.
Less inflationary pressure
He said: 'We still see Europe stuck in slow growth and are a little positive on US growth but continue to see negative inflation pressure on both.
'In the US, most of it's recent inflation has come from a weaker dollar but now it has stopped weakening so it has less ability to generate inflation.'
'For the UK, commodity prices based in sterling explains almost all of the inflationary moves over the last five years. We still see negative pressure from both going forward.’
Taking profits from credit after strong run
Jonsson has been taking profits on some of his US credit market positions after a strong recent run and he continues to be long on investment grade credit, bank loans and selective non-agency backed US mortgages.
'When we launched the fund in September we were fairly constructive on credit sectors and were more exposed to US than ex-US credit markets. We have taken some profits on those positions as credit has done well.'
‘We are constructive on credit risk overall, and prefer to own investment grade in combination with bank loans but don't own high yield because we think the former two have a much lower correlation to each other.
'We like investment grade credit because we think it is still undervalued and we also like non-agency mortgages in the US because of the improving US economic backdrop.’
Looking to add selectively to EM exposure
Jonsson continues to have low exposure to emerging market debt due to ongoing high levels of volatility, but he is looking to add to his positions in both local and hard currency over the next few months.
'We only hold a small allocation to emerging market debt but are looking to add. We have added a 1% position in Mexican local currency debt but in EM hard currency we hold 5% in a basket of countries.
‘Emerging market debt has become more attractive but there are still high levels of volatility so we are wary, but looking to add further exposure.
‘EM will become more attractive as credit continues to outperform. We expect that continue, providing a good opportunity to rotate some of our credit exposure into EM assets over the next year.’
Jonsson continues to view 10 year US and UK government bonds as 'close to fair value' but has a more negative view on the five year part of the curve in the US.
He also views Japanese government bonds as an overbought market and sees changing habits from domestic investors as playing a key role in causing JGB yields to rise over the next two or three years.
'We have taken the long term view on Japan that it is another overbought market and the BoJ is setting the prices in that market. The weak currency is filtering into the real economy and we believe shorting JGBs is an attractive way to make money.'