Having delivered solid returns in the face of an energy shock and major geopolitical tension, global bond markets look potentially well set going into the third quarter.
The common themes are resilience and robust fundamentals. Yields remain at attractive levels although the unresolved Middle East conflict remains a significant hurdle for bonds to negotiate in the coming quarter.
In the Global Fixed Income Outlook for the third quarter, our lead portfolio managers provide their analysis for the following:
Global sovereign bonds: Watching the new Fed Chair
Central banks remain at risk of any de-anchoring inflation expectations. If inflationary pressures persist, further rate hikes cannot be excluded. But it will likely require a major deterioration of the energy crisis for longer-dated sovereign bond yields to break out of the range in which they have traded so far this year.
Euro investment grade: Carry and income drive returns
by Victoria Whitehead, lead portfolio manager
The outlook for investment grade euro corporate bonds remains positive with investors continuing to seek the benefits of carry (coupon income minus the cost of funding) rather than capital appreciation.
Investors should remain attentive to both the risks and opportunities that geopolitical developments could potentially provide via increased market volatility. Active management and disciplined security selection will remain crucial in negotiating such volatility.
US agency mortgage-backed securities: Fundamentals remain robust
by John Carey, Head of Structured Securities
US agency mortgage-backed securities enter Q3 offering potential for carry without significant credit risk, but with relatively attractive valuations. Diversification and liquidity are additional inherent attributes to this segment.
As for other parts of the global bond market, the main risks are a renewed rise in rate volatility, lower yields that could trigger increased issuance, and uncertainty about future US monetary policy.
European high yield: Market supportive despite geopolitical tensions
by Olivier Monnoyeur, European High Yield Portfolio Manager
Credit fundamentals remain supportive in European high yield. Default rates are low, balance sheet trends are stable, and the profile for refinancing is manageable with robust investor demand.
The relatively low levels of incremental yield do require a selective investment approach while rigorous analysis of corporate balance sheets is necessary to identify the stronger issuers.
Emerging-market debt: Established resilience
by Alaa Bushehri, Head of Emerging Market Fixed Income
Although emerging market bonds have demonstrated significant year-to-date resilience, the geopolitical landscape has created a clear distinction between sovereign issuers that stand to benefit from the energy crisis – specifically oil-exporting nations with stronger fiscal revenues – and vulnerable oil-importing economies facing higher inflation and import costs.
As broad market yields have fallen, the focus has shifted to disciplined country selection, prioritising markets with durable fundamentals, credible monetary policy and a level of real yields that provide potential for sustainable returns.
