Views and Analysis

Fixed Income Update

The markets have reached a point of maximum fear yesterday as a result of the realisation that Mario Draghi may indeed not do “whatever it takes”, combined with a heightened fear of Ebola plus lower than expected consumer sentiment numbers from the US.

Has anything really changed?
 
The US is still growing at 2-3% GDP run rate
 
Companies have cash and are beginning to invest
 
Recent US employment numbers have continued to be robust
 
Europe is struggling but we knew that already
 
Greece is and always has been a basket case so heightened risk here should not be a surprise
 
Lower oil prices will boost consumer spending and lower raw material costs for companies
 
Deflation/slowing global growth are the key areas of concern but our central case is for low inflation and low growth
 
Lower for longer is good for bonds
 
The lower Euro will also provide a boost to European growth
 
Investors are adjusting for the end of QE but this is only $15billion while most of it has already been taken off
 
 
Impact on our Funds:
 
These are bond funds with low volatility. The High Yield market is down 1% MTD, the GHY fund is down 88bps and the GSB fund is down 26bps (net)
 
Credit selection remains key – neither fund has been invested in any of the problem credits in Europe
 
This is the recovery stage of the cycle – this will last longer than normal
 
Central Banks will remain accommodative for longer than investors expect
 
Low inflation with some growth is good for credit
 
The Global High Yield market is yielding 6.5% with extremely low default rates and is looking attractive
 
Spreads are now 530bps – the market is duration insensitive again
 
This is not the time to be lightening up on an asset class that should do well in the current environment