"In the portfolio a part of high yield must be there"
"Over the course of the year, we think returns in the asset class will be around 5-7% in US dollar terms. However, it is very important to differentiate and focus on quality."
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Key points
3' min read
The coupon effect will be a very important component in defining the returns offered by bonds, and in the high-yield segment it is a relevant component, always paying close attention to quality and diversification. The post elections in France will not alter the balance and the real unknown on the markets' horizon is geopolitical. Here is a summary of the position of Antonella Manganelli managing director and investment manager of Payden & Rygel Italia.
What impact will the outcome of the French election have on the European bond segment?
It could take weeks before there is clarity on the name of the next Prime Minister and the entire political, fiscal and reform strategy for the country. In the short term, uncertainty could lead to increased volatility, however, the picture is still positive for European bonds, as it remains likely that the ECB will continue with its expansionary policy.
And the spreads on ten-year bonds?
The spreads between French and German government bonds before the early elections were at about 47 bp. After the first round, this widened to 85 bp and since then the spread has retraced to around 60 bp. We believe this may be a reasonable floor until more clarity on the political set-up is achieved. On the credit side, however, the fundamental and technical picture both remain supportive. Significant widening due to uncertainty could be good entry points for some corporate, French and broader European stocks.
Shocks to the Italian market?
No. Arguably, compared to a right-wing victory, the political result in France has at least partially reassured on possible changes to the status quo in the Franco-German axis. In general, however, and this applies to almost all elections, the immediate impact tends to be short-term; what affects the markets more in the medium to long term are the actual reform policies, both fiscal and monetary.
How does the second half of the year look for the bond segment?
In the US, we expect that monetary policy rates may have to remain "sufficiently restrictive" longer than expected; the picture in Europe is different, where growth seems more moderate, and inflation closer to the ECB's targets. In both regions, the fragility of the macro outlook seems limited; at the same time, the curves remain inverted, and valuations pulled. This picture makes us patient on stretching interest rate risk ('duration'), but also favourable on high-quality credit positions, where most of the return will, in our view, come from the coupon.
