Following the Q2 rally, fixed income managers are considering their next moves. With global government bond yields hitting historic lows, investors are taking on more credit risk.
Avi Hooper, senior portfolio manager at Invesco, says two shifts provide a positive technical backdrop for global investment-grade credit.
First, with the global economy experiencing a demand shock, investors’ savings have increased, providing demand for bonds. “People aren’t spending, and naturally their savings go into financial markets,” Hooper said.
Second, central banks have been “the meaningful stabilizer” in global fixed income markets, he said — and “they’re not going away.”
In response to the pandemic, major central banks have become key participants in fixed income markets, making large asset purchases, including corporate bonds.
Phil Mesman, head of fixed income at Picton Mahoney, described the rally in fixed income, backed by central bank support, as a “gift” amid economic uncertainty.
From here, fixed income positioning must be carefully considered, he said.
Mesman’s call to action for advisors is to understand the risk/return potential of their allocations to fixed income. That includes considering the “real economy” impact to financial assets.
“We’re going to have winners and losers” in corporate credit, Mesman said. “Divergence is going to be the biggest trend in fixed income going forward.”
Some bonds are being issued for liquidity purposes, as opposed to financing growth, he noted. “We’ve had some of the worst quality issuance [in credit] I’ve ever seen in my career in the last two months,” Mesman said.
For investors, a focus on quality is key.
“Credit research will be a determining factor, in terms of the success of total returns, for active fixed income managers,” Hooper said.
Steve Locke, senior vice-president and portfolio manager at Mackenzie Investments, said his firm’s fixed income positioning across strategies was defensive as the year began based on expectations for a slowing global economy. He reduced credit exposure and expanded government bond exposure.
In the last two to three months, he’s started to add in credit risk, which includes some non-investment grade in certain core-plus strategies.
“But we’re doing it in a very disciplined way […] at this point in the cycle,” he said. “Not all businesses are going to emerge from this economic recession and Covid-19 shutdown.”
Hooper’s firm focuses on companies “doing the right things for bond holders,” he said. That may mean shoring up the balance sheet by cutting dividends and reducing capital expenditures so companies can pay bondholders in the future, he said.
In energy, for example, he took the opportunity to add debt from major Canadian names that were “unfairly punished” when oil prices collapsed. “These companies can weather the storm better than most,” he said.
He uses a core-plus strategy — looking outside Canada — to increase the potential for total return. In emerging markets, he continues to find opportunities in single-A rated companies, such as quasi-sovereigns. These are quality companies that produce a major resource, such as copper, and are guaranteed by quality investment-grade governments, such as Chile.
In the triple-B space, Hooper likes telecoms. “Those companies, whether they’re in Canada or the U.S., that provide the data and infrastructure for telecommunications offer value,” he said.
While these companies tend to have more leverage, “they’re doing the right thing from a balance sheet perspective,” he said. Plus, even in a weak economic environment, consumers require their services, much like utilities.