Standish Mellon’s Leduc remains ‘constructive’ on Eurozone bonds

David Leduc, head of active fixed income at Standish Mellon Asset Management (pictured), is ‘constructive’ on the high yield bonds, especially against the low yield investment backdrop and investors’ desire for income, but he remains cautious on Spanish government bonds.

High yield bonds have performed strongly this year, causing valuations to be less attractive, says Leduc. The economic contraction in Europe, particularly in peripheral Eurozone economies, presents a challenge for more cyclical sectors. As a result, he says, “we are slightly more cautious in our allocation to high yield and favour more defensive sectors such as packaging, cable and food.”

Leduc remains cautious about investing in the Eurozone. He says: “The risks to economic growth remain firmly tilted to the downside. The prospect of a lower growth trajectory for the region also implies that some Eurozone member countries are likely to miss their deficit goals for this year and this, in turn, could lead to the risk of further credit rating downgrades.”

As regards Spain, Leduc says the economic fundamentals “remain especially weak and we see a risk that ratings might be downgraded below investment grade over the next 12 months.”

Despite this, he says, “Spanish yields remain high relative to other European government bonds and we may become more positive on Spanish bonds in due course, given the potential for Spain to ask for bailout assistance and subsequent activation of the Outright Monetary Transactions – purchases of short-dated government bonds in those vulnerable Eurozone member states.”

However, Leduc noted some positive news from Spain this week, with the 10-year Spanish government bond yield having fallen after the nation posted a current-account surplus of €1.2bn for August. The Bank of Spain says this is the first positive reading since the introduction of the euro in 1999. Meanwhile, foreign portfolio investment showed an inflow of €2.3bn in August, the first positive outcome since February 2011.

“Elsewhere in the region,” he says, “we are finding the new issue market attractive; a large number of bank loans are getting refinanced into high yield bonds, therefore, there are many first-time issuers and these new bonds boast favourable terms and collateral. Over the longer term, we expect the shift from loan to bond financing to continue as European banks carry on contracting their balance sheets to meet new capital requirements,” he concludes.

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