Investment Focus: Adding value to global fixed income: Interest rates, corporate credit and forex

The four major areas leveraged by M&G Investments (UK) to add value to our portfolios with global fixed income holdings are through our active management of exposure to developed market interest rates, emerging market interest rates, corporate credit and foreign exchange. We analyse asset valuations (a bottom-up approach), combined with a top-down view of where we are in financial cycles, to make our investment decisions. Recently we have seen diverging monetary policies from global central banks as some emerging markets (particularly in Latin America) are starting to cut interest rates, the EU and UK are seen as possibly the first major economies to cut their rates in the second half of the year, and the US being the primary laggard with “higher for longer” interest rate expectations. Japan, in contrast, may be tightening its policy as it fights higher inflation and a weak yen. This variety of interest rate outlooks has created more opportunities for us to add above-market returns from our global bond holdings.

The generally more hawkish views from the US Federal Reserve – and indeed the markets – regarding US interest rates has kept US Treasury yields attractively high, particularly in longer-dated paper, compared to the start of the year. This has led us to take a slightly long duration position in USTs in many portfolios. By comparison, we have opted for underweight positions in Japanese government bonds (JGBs) and duration as one of our key calls, as the Bank of Japan is likely to be hiking rates, weakening JGB valuations. However, this would be supportive of the yen against the US dollar over the near term as the US eventually starts to cut its rates, reducing the attractiveness of the US dollar versus the yen. As such we have opted to hold yen currency.

Elsewhere, we find value in select emerging market sovereign bonds in local currency, compared to their hard currency debt. Not only are real yields more attractive, but it also adds the potential for forex gains.

Another attractive opportunity we are finding is in investment-grade corporate credit. While growth may be slowing, corporate yields are attractive. We don’t believe we are entering a phase of higher corporate defaults, and so we are selectively choosing debt from certain industries that can weather a slowdown reasonably well. This is done with the valuable expertise of our large credit team, who identify debt that is well-rewarded for the risk involved.

Investors can gain global fixed income exposure in either rand or US dollars through M&G unit trusts including the M&G Balanced Fund, M&G Global Balanced Fund, M&G Global Bond Fund, M&G Global Inflation Plus Fund and the M&G Namibian Balanced Fund.