Investors have the ability to invest anywhere in the world to get exposure to yield in fixed income markets.
But with central banks on different monetary policy paths, which regions are proving to be the yield hotspots?
Figures showing flows into fixed income can reveal a little more about which regional bond markets investors are favouring.
Nick Gartside, international chief investment officer, fixed income at JPMorgan Asset Management, observes inflows across bond sectors have been “overwhelming” year-to-date, even compared to last year which he recalls was a strong year for flows.
“Investment grade (IG) credit has been a particular beneficiary, with the US market receiving $68bn of inflows so far this year, compared to $28bn for the same period last year and $63bn for all of 2016, and the European market seeing year-to-date inflows of $29bn versus just $15bn in 2016,” he says.
Mr Gartside adds: “The momentum of positive flows in emerging market debt (EMD) is also exceeding last year, with nearly two-thirds of last year’s flows already gathered.
“Even US and European high yield, which have registered fund outflows year-to-date, are indirectly experiencing demand via flexible ‘go-anywhere’ bond funds, which are generally putting the $25.5bn of year-to-date inflows to work in risk sectors such as high yield.”
Figure 1: Sum of EMD, US IG and aggregate funds (US$m)
Source: JPMorgan Asset Management, Bloomberg
Flow data may paint a picture of where money has been going up until now, but working out which regions might be best for yield in the future may require a closer look at a country’s central bank stance.
Europe and UK
“A supportive central bank can do wonders for your regional corporate bond market, especially when one of the measures they are embarking on is a monthly bond buying programme,” points out Ben Willis, head of research at Whitechurch Securities.
“Given this, Europe has been favoured for some time and this has led to price increase and yield compression. Therefore, on a relative basis, the US is looking more attractive generally, particularly as they are in a position to raise interest rates.”
According to AXA Investment Management’s Nicolas Trindade, a senior portfolio manager, the main opportunities to increase yields can be found in the UK and European high yield markets.
| Global G7 Sovereign Debt | Global Investment Grade Credit | Global High Yield | Emerging Markets | |
| Market value (USD) | 23trn | 9.7trn | 2.1trn | 0.9trn |
| Yield to worst (%) | 0.99 | 2.6 | 5.29 | 4.56 |
| Modified duration to worst | 7.89 | 6.48 | 3.64 | 4.59 |
| Average linear rating | AA2 | A3 | B1 | BBB- |
| Number of issuers | 7 | 1,947 | 1,463 | 547 |
Source: AXA Investment Managers, Bloomberg
There also seems to be agreement European yields have reached the bottom.
Mr Trindade notes: “We expect yields in Europe to go higher, not lower. Pick-up in growth and inflation will cause the ECB to announce tapering of its QE programme in the fourth quarter of this year, with any subsequent rate hike not taking place before 2019.”
