PORTFOLIO Bonds & fixed income

Bond markets, time to get out of the more vulnerable euro aggregate market

The economic scenario has rarely been so favourable to the credit market: the global economy is in a cyclical upturn, recessionary risks are more remote, and inflation remains contained, although still rising.

That said, rate risk management remains a significant issue for fixed-income investors. An active investment strategy – so-called “absolute performance” – and keeping away from the euro aggregate segment will provide strength and stability.

With the United States taking up its place as the engine of recovery in global economic growth, the US Federal Reserve began to normalise its monetary policy in December 2016. The Fed is pencilling in another rise in its leading rates in 2017, to follow the one in March, along with another three in 2018. The solidity of US economic fundamentals is supporting the valuations of risk assets, and the Fed could finally – albeit gradually – normalise its monetary policy.

The rise in the federal funds rate should support the increase in interest rates in both the United States and Europe. US interest rates have already rebounded by 50 basis points (for 10-year rates) since hitting their low in June 2016. European rates have done the same and will continue to follow this trend in the coming months. This rate risk – or, to put it another way, the risk of corrections on the fixed-income markets that are most sensitive to rates –, associated with the resurgence of political uncertainties in Europe, is exposing the euro aggregate segment, and the sovereign debt segment in particular, to potential underperformances.

Turning to politics, the French presidential election is a major source of uncertainty. At the moment, the chance that an extremist party could come to power and trigger a “Frexit” is rather unlikely. That said, should such a scenario come about, it would have a disastrous effect on the European sovereign debt markets. Investors cannot ignore this risk, no matter how small it may appear.


Christel Rendu de Lint - Head of Global & Absolute Return Fixed Income - Union Bancaire Privée (UBP)

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