In the lead up to Tuesday’s RBA Monetary Policy Board meeting to assess the cash rate, Jay Sivapalan, Head of Fixed Interest at Janus Henderson in Australia assess the outlook for fixed income investments.
There is a differentiated outlook starting to occur between Australia, the US and in Europe in terms of fixed income.
State governments, no doubt are fiscally deteriorating. But there are quite good spreads available for investors, especially when you compare it to corporate credit today. State government bonds have performed really well in the context of the last few months, and we continue to think of them as a great opportunity set for the year ahead.
When we move on to the corporate debt sector, investment grade markets – whether it’s here or in the US or Europe – are in reasonably robust situations when you think about their fundamentals. But, there has been a technical drive, where spreads have really narrowed and we’re starting to just moderate our enthusiasm in relation to avoid positions in corporate credit.
Looking further afield, especially the lower quality end, you would have heard a lot of discussion about payment in kind, some defaults, including soft defaults coming through in the US, some pockets of private markets and some pockets of the loan markets.
We’re much more cautious in those areas. We don’t see the reward for the risk. And so therefore in our various portfolios, we are largely, quite underinvested in those areas.
And then finally, credit protection is really cheap today. So overall we’ve got a constructive view for the year ahead. We’re playing it a little bit safer in the higher credit quality end.
We’re using instruments like state government bonds. And we are seeing some opportunities in yield curve positioning, especially the long end when you have the sell offs in markets.
