All year round, macroeconomic indicators have influenced the markets, keeping them predominantly oriented towards a scenario ofsoft landing. However, the dynamics changed in early August, when weakening US payrolls caught global investors by surprise. This event raised questions about whether this was the beginning of a change in trajectory towards a recession or simply of an anomaly in the data.
How to position bond portfolios
He explains it Andrew Lake, Head of Fixed Income, Mirabaud Asset Management in the commentary where he points out that “bond markets have also shown a longer-lasting recession-related anomaly. The yield curve in the United States, typically seen as a leading indicator of recession, has been inverted for about 18 months. In some parts of the curve, the inversion has softened over the summer, as expectations of a first rate cut by the Federal Reserve have increased, thus causing the short end of the curve to outperform. For the long end of the curve to start outperforming, we would need to see clear signs of recession, based on indications from US payroll data”.
Pending greater directional certainty, “we can look across the fixed income landscape to assess the opportunities that the second half of the year could offer, with a potentially positive outlook for bonds. We see opportunities across the market, but we believe that clear distinction between different geographies will be a key driver of performance. The US, Europe and the UK each have specific economic characteristics that require a differentiated approach at the regional level”.
MAM analysis
In Europe – explains the expert – It makes sense to maintain a longer durationas interest rate cuts have already started and we expect one or two more to follow before the end of the year. While inflation is on target, the European economic environment remains complex, with Germany struggling to grow and losing its role as the driving force of Europe. As a result, euro high yield looks less attractive than it did in early 2024, but we continue to see potential in investment grade bonds, albeit with less cyclical exposure.
The situation “It’s slightly different in the UKwhere sterling high yield bonds are offering more attractive coupons in a recently stabilised political environment. With a newly-established Labour government, we do not expect significant fiscal changes in the UK for at least six months, making sterling exposure favourable for the remainder of the year. Our current favourites include some budget supermarket chains, which are benefiting from inflation and the shift of interest rate-stressed consumers to low-cost food. We also look at leisure sector bonds with interest.”
United States, elections unknown
In the United States, uncertainty about interest rates and inflation “leads us to remain cautious on duration. However, unlike Europe, the overall strength of the US economy should support high yield. Although a scenario of ‘Goldilocks’ seems unrealistic, a possible rate cut in September, followed by another in December, could create a favorable environment for high yield bonds. We are particularly interested in high-coupon bonds issued by solid companies with positive outlooks, where the return drivers are more idiosyncratic. In contrast, after strong performance, crossover bonds that straddle the high yield/investment grade divide now offer low coupons and little potential for capital appreciation, making them a segment we will move away from in the second half.”
As for the US elections, “a Trump victory could have a positive impact on stock markets and, consequently, support credit. On the other hand, the possible presence of Harris in the Oval Office could be less favorable for sectors such as oil & gas, but it could also create opportunities for environmental and sustainable bonds, encouraging investments linked to the energy transition and sustainability”.
Overall, markets may continue to show volatility until concrete responses are triggered by interest rates, recession or political dynamics. The theme of coupon incomeshould remain relevant throughout the year. However, “we expect a clear regional distinction, with a focus on higher quality positions in Europe, to drive outperformance in the second half of the year. Flexible strategies, capable of dynamically allocating between different sectors and geographical areas, will be well positioned to capitalize on widening spreads in bond markets.”
