Fixed IncomeMar 24 2014

Snapshot: Now is not the time to go with the herd

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ByFraser Lundie

There are still pockets of good value, such as recent German issuer Lowen. The company benefits from low leverage, good free cash flow generation and consistently high margins. In addition, the recent deal was structured to ensure bondholders are attractively compensated should the company perform, avoiding a lot of the shareholder friendly ‘leakage’ that has become prevalent in other areas of the high yield market.

There is value on the cusps of emerging markets, particularly in higher quality countries and corporates. These are global business operations, with large capital structures. As many of these companies are exporters, they are benefiting from emerging market currency weakness.


The biggest effect on fixed income markets has come with Federal Reserve tapering initiated in December 2013. The bid yield on 10 year US treasuries has improved from 2.06 per cent on March 11 2013 to 2.77 per cent a year later.


In January, Moody’s upgraded Ireland’s sovereign debt rating to Baa3 from Ba1 and its outlook to positive. On March 13 the National Treasury Management Agency had its first 10-year government bond auction since 2010.


The Bank of Japan is maintaining its strategy of monetary easing, including the purchase of Japanese government bonds at an annual pace of roughly 50trn yen. It aims to achieve a price stability target of 2 per cent.


Portugal has seen one of the largest compressions in its 10-year government bid yields, dropping from 6.05 per cent in March 2013 to 4.4 per cent a year later. Ratings agencies have put the outlook for the country as positive.


The Bank of England says falling unemployment is unlikely to push it into raising interest rates before it is ready. The bid yield on 10-year UK gilts has risen from 2.03 per cent in March 2013 to 2.78 per cent a year later.


In March, Chaori Solar Energy, a 1bn Yuan Chinese corporate bond defaulted. But the BofA Merrill Lynch Global Research team suggests “a systemic crisis requires a string of low-probability bad outcomes.”

Fraser Lundie is co-head of Hermes Credit