'The biggest opportunities are in corporate bonds'
"Particularly on corporate bonds there is value in junior debt in the telecom, utilities and real estate sectors."
3' min read
Key points
3' min read
The credit segment is more attractive than government bonds, while the bond market in general has normalised after 10 years without the unconditional support of central banks. This is explained by Gabriele Foà, portfolio manager at Algebris Investments, a management company that manages around EUR 25 billion.
What is your outlook on rates, also in light of the recent turbulence in the markets?
The focus of central banks is shifting to the economy from inflation, which is showing signs of moderation. Compared to 2023, when disinflation was driven by a few volatile sectors, now all components are falling, including residential and services. Economies, on the other hand, show signs of fatigue. In Europe, Germany will not grow this year and manufacturing data are worrying. In the US, the labour market slowed down. In recent days the stock market has begun to predict a recession and a lot of central bank cuts. This is too extreme a conclusion, exacerbated by the August volatility. We still think two or three cuts from the Fed and ECB are likely.
The second half of the year will be marked by the US elections. What repercussions do you see?
Both parties have expansive fiscal proposals. The US deficit in 2023 has reached USD 1.7 trillion, the highest since the post-war period. Whoever wins will have to deal with the debt vortex and market attention to the issue is growing. The Republican platform also has other critical issues, such as the introduction of tariffs and duties, which could have a strong impact on inflation and currency markets, and a less active approach to foreign policy. The government's presence in the economy will increase in both cases, a Republican victory would be more conducive to growth albeit with greater volatility.
Then rate cuts but expansionary fiscal policy. What implications for bonds?
The most obvious is a steepening of the curve. The short end of the curves may be supported by cuts, but this does not always translate into support for longer maturities. Higher inflation expectations in the long run and more issuance to finance rising deficits weaken higher maturities. It will be necessary to approach government bonds and duration very cautiously, despite falling rates. In addition, the market is already discounting more cuts than is reasonable to assume and rate volatility remains high. The bond market has become difficult after 2021.
Bonds are therefore back to being a difficult and volatile market. And credit?
The combination of rate and spread means that there are more attractive yields on credit than on government, With declining but positive growth, it is the segment that has the most value on fixed income, although not everywhere. Investment grade has followed rates in recovering and now offers tight spreads. On the higher yield side there are opportunities but also risks.
