Stronger economic growth and accelerating inflation present a bit of a headache for fixed income investors. The absolute low level of German Bund yields earlier this year and their extreme spread versus US treasuries – an historic high since the late 1980s – won’t have made sense to many investors in the context of accelerating growth and inflation within the eurozone. The obvious trade in this scenario was to short Bunds.
But it is not all about shorting bonds: a few long opportunities remain for active and global investors. European banks’ subordinated credit offers both attractive spreads and fundamentals –European banks being one of the few sectors still in a deleveraging and de-risking mode. Local debt of Brazil and Russia benefits from a virtuous cycle of orthodox monetary and fiscal policies leading to lower inflation, allowing their central banks to begin easing interest rates and ultimately supporting the solvency of the state.
More than ever, risk management and careful portfolio construction will be key to navigating what remain treacherous markets in 2017.
Jean Medecin is a member of the investment committee at Carmignac
