BlueBay’s update on European bonds

Russel Matthews, portfolio manager European bond strategies at BlueBay Asset Management, gives his view on the markets. 

As Q1 draws to a close investors are drawing breath on what has been a pretty wild ride.

At the midpoint of the quarter in February, the S&P index was down more than 10%, oil 20% and credit markets were in freefall.

By the end of March, credit spreads are tighter on the year, the S&P is up 1%, and oil is up nearly 10%. We view economic activity as being remarkably stable over this period, but the “new” news is that primary central bankers have turned a lot more dovish and there appears to be something of a hiatus in the currency war that appeared to engulf the global economy in 2015.

Our views have not changed much in recent weeks.

The dovish rhetoric out of the Federal Reserve has given risky assets a boost, and the actions of the European Central Bank will keep European fixed income well bid in the near term.

We have this position on with long sovereign positions in the Eurozone periphery (Italy, Portugal and Cyprus) and Eastern Europe (Bulgaria, Romania and Croatia). We also maintain a long duration positioning through a German Bund option as core yields continue to decline.

More generally, the macro backdrop looks constructive in the near term but we are uncertain of the longevity of the current rally in risky assets.

The conundrum investors face is that the only real value in corporate credit exists in the more illiquid corners of the market, in names and securities that do not offer an “out” if the market turns and risk sells off.

The longer term risks to the market remain in place and we are sceptical that the central banks have managed to mitigate the overhanging macro threats.

These include the same risks we have been citing for some time; Chinese financial stability and its FX policy, the oversupply in commodity markets, Brexit and the escalating migration and refugee crisis in Europe.

Consequently, we are happy to continue running short spread risk in the corporate domain.

It only remains for us to wish you a constructive start to the new quarter.

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