The importance of going global
Low yield environment
Interest rates remain close to historical lows despite the global economy growing at a steady pace with the search for yield becoming more and more difficult. While the US Federal Reserve is in a tightening cycle, it remains gradual and the central banks of many other developed countries maintain accommodative monetary policies. The European Central Bank (ECB) has not yet provided details on its plan for exiting its quantitative easing program, but leaked language on tapering suggests modestly higher interest rates over the next two years as the economic situation continues to improve. Meanwhile the Bank of England is likely to be cautious on raising interest rates – it needs to balance inflation concerns and growth prospects against an uncertain background of Brexit negotiations and a minority Conservative government. However, should growth and inflation surprise on the upside, there is a risk that major central banks fall behind the curve and need to withdraw liquidity and hike interest rates more aggressively, which could lead to a sharp rise in global bond yields.
The importance of going global: harnessing yield opportunities and diversification
In our view investors have predominantly three ways to enhance yields: they can go down in credit quality, look globally for opportunities or extend maturities. Since the latter is not as attractive due to flat yield curves and the threat of rising yields, investors are increasingly embracing global markets in their hunt for higher returns. Despite declining risk premiums across the board, due to central banks’ bond buying schemes, yield opportunities are still available in the global credit market. Depending on an investor’s risk appetite, the yield pickup can still be quite rewarding.
By investing across the global fixed income market, investors can also benefit from enhanced diversification and therefore reduce portfolio risk. Investors can have access to a wider range of sectors and geographies compared to single markets. For example, the energy market in the US is much larger and more diversified than in Europe or the UK, and therefore offers comparably greater investment opportunities. To the same extent, the UK’s securitised debt market and Europe’s subordinated debt market are attractive areas that a global investor can benefit from.
Below is a summary of what can be achieved by investing in four of the major global bond markets: global sovereign, investment grade credit, high yield and emerging markets.
Another advantage of a global approach can be found in cross currency relative value trading. A key theme in today’s bond market is the high level of issuance of ‘reverse Yankee bonds’ - these are bonds that are issued by US corporates in the Euro-denominated bond market. The ECB’s bond buying programme and accommodative monetary policy have in some cases made it cheaper for US companies to issue bonds in Euros. As a result, global investors now have an even greater opportunity to pick one issuer’s bonds in the cheapest currency and benefit from mispricing opportunities.
1 Source: AXA IM, Bloomberg as of 30 April 2017 (BofA ML G7 Government Index, W0G7)
2 Source: AXA IM, Bloomberg as of 30 April 2017 (BofA ML Global Investment Grade Corporate Index, G0BC)
3 Source: AXA IM, Bloomberg as of 30 April 2017 (BofA ML Global High Yield Index, HW00)
4 Source: AXA IM as of 30 April 2017 (JP Morgan Corporate Emerging Markets Bond Index, JBDYCOMP)