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Where are the pockets of value in fixed income?
by James Phillipps on Oct 17, 2013 at 10:48
Lingering concerns around the eurozone sovereign debt crisis are continuing to uncover relative value trading opportunities.
Jon Jonsson, co-manager of the newly launched Neuberger Berman Global Bond Absolute Return fund, is playing the disparity between US and European rates, which he says have moved disproportionately out of kilter on the back of fears about Federal Reserve tapering and eurozone instability.
‘The spread is around 80 basis points (bps) between the US and Germany, which is attractive as this level has not been sustained historically. We would expect it to revert to closer to 25-50bps on a long-term basis,’ he said.
High yield opportunities
Jonsson is also finding opportunities in high yield, which he says is relatively attractive if one separates the credit and duration.
‘If you just look at high yield on a yield basis it looks fully valued, but if you separate out the credit and duration components, the credit component is trading at a 475bps spread over governments. It is pricing in over 4% default rate versus our expectation of around 2%, that still offers value,’
The fund is long investment grade credit, with a number of positions in bank loans and non-agency mortgage backed securities.
The Dublin-domiciled Neuberger Berman Global Bond Absolute Return fund targets an annualised return of cash plus 4% over the market cycle.
It has a flexible mandate with the managers able to invest across the fixed income spectrum, including playing interest rates and currency.
The managers use the firm’s proprietary ‘state-space analysis’ framework to help shape the asset allocation within the portfolio. This incorporates what market expectations are for the return from any given fixed income sub-sector, what each sector team expects the return to be and what confidence they have in that expectation.
The sector teams are required to factor in a range of variables, such as the growth outlook, the potential impact of a sovereign shock and the probability of these scenarios coming to fruition.
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