26 JUN


Fixed Income , Asset Class

We are underweight in duration and negative on Italy

Government Bonds

In recent weeks, US treasuries have rallied on the back of significant political risks and concerns over trade wars. Our long position hence proved rewarding in this context. As we are seeing some respite in the markets, we intend to hold an underweight position on the front end of the US curve (2Y) as the Federal Reserve is expected to maintain its current trajectory and raise rates in June. In Europe, the continuous rise in the activity cycle and the tapering of QE by the ECB was instrumental in our decision to hold a short position on the core EUR curve.

The recent political tensions in Italy have had (albeit limited) spill-over effects on peripheral sovereign bonds, whose yields have recently widened. In this context, we have benefited from our underweight position in Italian bonds, which was established in January this year. Government promises include reforms that could  significantly increase debt levels and deficits and we continue to hold a negative view on Italian debt. Furthermore, valuations have now turned more attractive across peripheral sovereign bond markets following the recent widening. In this context, we aim to tactically manage Spanish and Portuguese sovereign bonds.

We continue to hold a long position in US, Euro and Canadian break-evens as the outlook for these assets remains positive. The markets appear to be supported by the positive carry profile (US, EUR). The inflation cycle, reinforced by the recent data, is strong for all three countries.


Idiosyncratic risk has risen in US credit. The psychological threshold of 3% on US 10-year treasuries continues to weigh on risky assets and the US HY segment also could see an increase in defaults over the next few years. With the backdrop of a rebound in the economy over the second quarter and supportive company results, the asset class could find itself well supported in the near term.

In this context, while we maintain a cautious view on US credit, we prefer to reduce our underweight by purchasing cash bonds on the investment grade market, which is likely to see a temporary rebound of sorts. On the US High Yield front, we aim to reduce our shorts through the derivatives markets, where positioning appears to be long risk.

Risks are also rising in European peripheral names, which are suffering from the political turmoil in Italy. The Euro High Yield market faces some idiosyncratic risks. However, fundamentally, IG corporates are in good shape and, after years of cautious spending, they have strong cash balance sheets, lower leverage and restored margins. European assets have become more popular with the continued support of the ECB (until the end of 2018 at minimum). In order to take advantage of the recent widening, we aim to slightly increase our allocation to non-financial European credit.

Regarding convertible bonds, with credit spreads still expensive, but becoming less so in both the IG and HY space, this asset class is an interesting source of diversification in the current environment.

Emerging Debt

With a yield of 6.2%, emerging debt hard currency compares well to fixed income alternatives as the risks to higher US Treasuries from monetary policy normalization have so far been offset by the synchronized global growth recovery and the solid performance of commodities. The case for emerging debt remains supported by the accelerating emerging market growth, contained China risks and elevated commodity prices. Asset class valuations have been extended on an absolute basis, but remain attractive versus US credit.

We are overweighting sovereign credits (Argentina, Egypt, Ukraine) with supportive reform momentum, and energy exporters (Angola, Ecuador, Kazakhstan, Nigeria).

We are underweighting US Treasury-sensitive credits with a limited spread upside like Chile, China, Malaysia, Panama, Peru, the Philippines, Poland and Uruguay.


The overall framework – based on rate differential, carry-to-risk and economic surprises – is negative for the US dollar. The currency remains under pressure. However, we aim to manage the exposure tactically, as the trade remains vulnerable to Fed communications, especially with the uncertainty surrounding the central bank. We are tactically short US Dollar and long Norwegian Krone.

On the emerging side, we are, in the near term, OW currencies of commodity exporters, and are maintaining a constructive medium-term stance.