The hard realities of policy divergence

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By Iain Stealey, fund manager, JP Morgan Funds – Global Bond Opportunities Fund

The hard reality of policy divergence – with the ECB unleashing quantitative easing (pumping more than a trillion euros into the economy) last week just as the US Fed sits at the cusp of tightening – is causing global currency spasms and market angst.

While the plunging euro has grabbed most of the headlines, global unconstrained fixed income manager Iain Stealey says the gyrations underscore a more fundamental point for bond investors: the need to be nimble.

Stealey and co-manager Nick Gartside take a ‘best ideas’ driven approach to generating total return, irrespective of benchmark, giving them the freedom to seek out the best sources of yield.

That flexibility is critical for piloting the distortions of today’s bond markets, claims Stealey, pointing for example to the relative valuations causing 10 year US Treasuries to seem high yielding by comparison to the rest of the world. He cites the aggregate yield on the JPMorgan Global Government Bond Index – representing core government bonds across the G-10 with about 22 trillion USD in debt.

He notes that with 10 year Treasuries just north of 2%, their yields are currently higher than approximately 90% of the world’s government debt. In other words, even if Treasury yields go a little higher from here, they are still attractive compared to the rest of the world for a global bonds investor.

So, in this environment, where should yield hungry global bond investors be looking for return and income?  Stealey explains the thinking behind one of his highest conviction current investment ideas, European high yield debt.

The sector may no longer offer particularly ‘high yield,’ but Stealey points out that everything is relative. In other words, compare the modest yields in European HY to those on offer in other parts of the bond market.

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