As long as major central banks continue to focus on accommodative monetary policies, global government bond yields will remain depressed.
So “it’s essential to have the flexibility to look elsewhere for income and total return opportunities,” says Robert Abad, a product specialist at Western Asset Management. His firm manages the Renaissance Multi-Sector Fixed Income Private Pool.
Currently, emerging markets are promising, “given the higher yields offered in that space versus developed markets,” he adds. “One company that we’ve added to our portfolio is Petrobras, the national oil company of Brazil.”
Petrobras’ operations and valuation have been negatively impacted for the past two years, on the back of a political scandal that’s still being dealt with, says Abad. “However, with the introduction of a new, market-friendly government [and] a more credible management team at Petrobras, we felt it was time to look more closely at [the company’s] story.”
Further, “a stabilization in oil prices supports Petrobras’ earning capacity going forward.” For example, the oil company’s longer-yield bonds are particularly attractive, Abad notes, “given attractive yields between 8% and 9%, and the issuer’s high correlation toward Brazil’s improving credit story.”
Investors can also consider Russian local-denominated government bonds, “which are yielding around 9%,” he explains. “With the help of stabilizing energy prices, growth in Russia is coming in better than expected. [This] allows the government to run a current account surplus and smaller fiscal deficit.”
The country’s central bank has also been able to interest cut rates to support this recovery, says Abad. But there are also still very high interest rates in Russia, which “makes for an attractive rate and foreign-exchange investment opportunity.”