As major central banks such as the US Federal Reserve and Bank of England have been grappling with stubbornly high inflation and edging interest rates upwards, fixed income investors have seen pockets of opportunity open up.
A recent rise in government bond yields and wider spreads is making bond investment look increasingly attractive to longer-term investors. We do not see yields coming down as quickly as the market expects.
We believe there are real opportunities out there in an unsettled market which is ripe for active managers to pinpoint advantage from wider dislocations.
While government bond markets suggest we are close to peak rates, choppy moves in yields and ongoing market uncertainty continue to expose positive investment prospects.
Select fixed income markets are seeing some of their highest yield levels since the global financial crisis. There are credit opportunities emerging in asset class sub-sets as diverse as investment-grade corporates, asset-backed securities, municipal bonds and emerging market corporate debt.
Increasing focus on responsible investment is also stimulating major interest in impact bond investing.
US opportunity
From a corporate bond perspective, we believe an active investment approach could help investors to identify positive opportunities passive managers might be more inclined to miss.
By example, the US banking sector, where problems in the regional domestic banking sector spurred major investment outflows even from some banks with strong balance sheets and healthy underlying fundamentals.
There are US entities known as super regional banks which, if they were in Europe, would most likely be considered ‘national champion’ banks given their size and capabilities.
These banks serve large parts of the US but not necessarily the whole of the country. Importantly, they do not tend to have potentially risky investment banking operations.
This layer of relatively large US banks sits between the biggest players and the smaller regional banks and enjoys tight regulation, less reliance on net interest income and more diversified loan books versus smaller regional players.
Historically, investors have viewed these banks as being less risky than some of the biggest ones and they are actually well diversified without any real exposure to investment banking.
The fact they have ‘regional’ in their name at a time when many were preoccupied by the regional banking crisis meant several of these names were sold off.
However, after some close and careful analysis, we believe this tier of banks look cheap and may well be less risky than some alternative banking sector opportunities.
Emerging market opportunity
At a global level, we believe the emerging market corporate debt market offers significant market potential, thanks to mid-to-long range market growth forecasts and comparatively attractive yields.
We believe we are in a growth environment that favours emerging markets over developed markets. This positive growth dynamic typically leads to inflows into the emerging market corporate debt asset class.
Net leverage remains lower in emerging market corporate debt than in both developed investment grade and high yield debt markets and yields are at their most attractive levels in decades.
Peter Bentley is co-head of fixed income at Insight Investment and portfolio manager of the BNY Mellon Global Credit Fund. The views expressed above should not be taken as investment advice.