Home / Inflation linked-bonds, credit risk preferred amid uncertainty

Inflation linked-bonds, credit risk preferred amid uncertainty

A lot has changed over the past few months – successful COVID-19 vaccines have been deployed, President Joe Biden announced his plan to tackle climate change, “unprecedented” fiscal stimulus legislation was passed in the US, and steps towards reopening the global economy continue to unfold.

  • These factors have driven a more-than-doubling of five-year US Treasury bond yields in just three months. Central banks remain on hold as markets price-in further easing from Europe and Japan, and no interest rate rises in other major developed markets for two to three years.

    With high yield spreads unchanged in 2021, the reopening of the global economy sets the stage for some of the strongest growth levels since the financial crisis. The team at Neuberger Berman has set out three themes on which it thinks investors and advisers should focus, going forward:

    1. Focus on Yield Without Duration

      High yield, loans and other sectors that offer an attractive yield with minimal duration risk should be the focus of investors, NB suggests. With duration and credit risk the major inputs into fixed income returns at this point, NB suggests pulling the lever on the latter given the uncertain outlook for bond rates.
    2. Use inflation-linked bonds and dollar exposures to protect against inflation

      Inflation is likely to start increasing as government spending and stimulus measures expand, including the latest US$3 trillion ($3.9 trillion) announcement made by President Biden. This highlights the benefits of inflation-linked bonds and their ability to protect against inflation by virtue of the indexing of their capital value to changes in the CPI.
    3. Sector and Security selection continue to rise in importance

      Neuberger Berman says that despite the virus fading, the focus will remain on secular winners, due to the fact that not all “COVID losers” stand to benefit from the distribution of vaccines or at the levels initially predicted. At the same time, the release of vaccines will open up new sectors and new opportunities that will be supported by strong tailwinds, with investors required to be nimble. Some background into these sectors is shown below, with secular winners defined as those in longer term growth thematics:

    Neuberger Berman believes portfolios should emphasise high-yield bonds, loans, and other sectors offering potentially attractive yields with minimal duration risk. Confidence is returning and there is more certainty regarding economic growth. This saw a moderate increase in yield.

    The team now looks for opportunities across fixed income sectors that deliver strong returns, consistent income, low volatility and downside protection, using its decades of experience in risk management. Downside protection is built-in through portfolio construction techniques and security selection processes, to reduce the frequency or magnitude of losses.

    Ishan Dan

    Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.




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