Fixed Income

Insight Absolute Return Bonds: The Big Picture

Insight Absolute Return Bonds: The Big Picture
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Inflationary and volatility fears look set to preoccupy fixed income investors in 2017 with anticipated U.S. interest-rate rises presenting only limited concern, according to Peter Bentley, head of UK and global credit fixed income at Insight Investment, a BNY Mellon boutique.

Commenting on the wider financial backdrop, Bentley says the key challenge facing fixed income investors in 2017 could be managing volatility in a global economy facing increasingly expansionary policies in the U.S. and a more positive growth environment in Europe, offset by political unpredictability.

“While we expect to see some growth in the U.S. and Europe, there are risks and fears inflation could get out of control if it rises more rapidly than expected. There is also some concern over whether U.S. growth policies will be executed properly.

“These, together with concerns on the Chinese economy and uncertainty over the forthcoming European elections mean managing upside/downside volatility in 2017 will be a key theme,” he adds..

MARKET MOVES

While the U.S. Federal Reserve’s (Fed) central forecasts indicate it will raise interest rates up to three times this year, Bentley is sanguine about the impact of any hikes. He believes they have already been largely factored into the market.

“We agree on the central case for Fed interest-rate hikes but realistically we believe that is not what is going to drive fixed income markets this year. Instead, we think bond risk scenarios and concerns about inflation could dominate thinking,” he says.

“One risk scenario is the danger that inflation gets out of control, the Fed does not do enough and bond yields spike more quickly. Equally, another risk is that President Trump’s pro-growth policies become watered down and are not as effective as initially expected and the U.S. economy starts to slow down towards the end of the year.”

“We believe in analyzing different areas of fixed income in depth, generating ideas that may give us an extra edge in terms of coverage and adopting a systematic investment process with tight risk management and procedures. We invest in fixed income in a non-directional way—making money in different markets rather than relying on markets to go our way.”

FLEXIBLE ALLOCATION

Looking ahead, Bentley says he sees potential pockets of opportunity in a range of fixed income sectors— including emerging market (EM) debt—with low correlations to U.S. Treasuries and bonds. “In terms of very short maturity EM plays, markets such as Brazil, Russia, Indonesia and Colombia all offer high yields and decent value provided you adopt a cautious approach to currency exposure—hedging currency risk while taking yield,” he adds.

CREDIT POTENTIAL

On the credit spectrum, Bentley predicts a relatively benign default environment for assets such as high yield in the months ahead, adding that he prefers to seek selective opportunities in short maturity high yield instruments. In the government bond market the strategy has a short bias, and while Bentley said he expects yields to rise, he remains cautious on developments within the sovereign bond sector.

Against a backdrop of rising inflationary pressures, the strategy has recently taken advantage of potential benefits in the index-linked bond market.

Commenting on market prospects for the months ahead, Bentley says: “From a market perspective, we believe we are in a mildly positive growth phase which holds pockets of opportunity but also some potentially high risks, especially but not exclusively based on political risk.

“While we do expect inflationary pressures to build, particularly in the U.S., we believe there are also some positive stories to come. The key, whether investing in the U.S., Europe or other markets, is to be selective about the assets you buy. Careful research and thorough risk assessment and management will be important factors in achieving success in the months ahead,” he concludes.

Not FDIC-Insured. Not Bank-Guaranteed. May Lose Value.

BNY Mellon Investment Management is an investment management organization, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.

RISKS

All investments contain risk and may lose value. Equities are subject to market, market sector, market liquidity, issuer, and investment style risks to varying degrees. Small and midsized company stocks tend to be more volatile and less liquid than larger company stocks as these companies are less established and have more volatile earnings histories. Investing in foreign denominated and/or domiciled securities involves special risks, including changes in currency exchange rates, political, economic, and social instability, limited company information, differing auditing and legal standards, and less market liquidity. These risks generally are greater with emerging market countries. Bonds are subject generally to interest-rate, credit, liquidity and market risks, among other factors, to varying degrees. Investments in foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the case of hedged positions, that the U.S. dollar will decline relative to the currency being hedged. Each of these risks could increase the fund’s volatility.

Investment advisory services in North America are provided through four different investment advisers registered with the Securities and Exchange Commission (SEC), using the brand Insight Investment: Cutwater Asset Management Corp. (CAMC), Cutwater Investor Services Corp. (CISC), Insight North America LLC (INA) and Pareto Investment Management Limited (PIML). The North American investment advisers are associated with other global investment managers that also (individually and collectively) use the corporate brand Insight Investment and may be referred to as “Insight” or “Insight Investment.”

Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd., registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario.

This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular investment, strategy, investment manager or account arrangement. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Please consult a legal, tax or investment advisor in order to determine whether an investment product or service is appropriate for a particular situation. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

The Dreyfus Corporation, Insight and MBSC Securities Corporation are subsidiaries of BNY Mellon. ©2017 MBSC Securities Corporation, Distributor, 225 Liberty Street, 19th Fl., New York, NY 10281.

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