Beyond the stock market there are other markets that investors have been focusing on for more than a year. In addition to money market funds, which have become very greedy for some analysts, after interest rates have risen to 5.5% in the United States, fixed income has emerged as the big winning horse for some investment banks . and managers.
The increasing volatility of bonds, measured by the MOVE index, is marking this path of opportunity. “The greater the volatile bias, the greater the ability to capture bargains,” Morgan Stanley’s credit team recently said in a report. And, precisely, this index has risen 9% in recent weeks and 104% since September 2021 – just 2 years ago.
“This increased volatility, triggered by recession fears, along with inflation and persistently rising interest rates, is uncovering some interesting areas of opportunity for active fixed income investors,” said Peter Bentley, co-head of fixed income from Insight Investment.
As major central banks such as the US Federal Reserve and the Bank of England battle stubbornly high inflation and raise interest rates, fixed income investors see new opportunities opening up. “The recent rise in government bond yields and widening spreads make fixed income investing increasingly attractive to long-term investors. “We don’t see yields falling as quickly as the market expects,” he notes.
In his view, there are real opportunities in an unstable market that is ripe for active managers to capitalize on broader disruptions. “Although government debt markets suggest that we are close to maximum rates, choppy movements in yields and current market uncertainty continue to reveal positive investment prospects,” he says.
Certain fixed income markets are seeing some of their highest levels of performance since the global financial crisis. That’s why credit opportunities could be emerging in subsets of asset classes as diverse as investment-grade corporate bonds, asset-backed securities, municipal bonds and emerging market corporate debt. Increasing attention to responsible investing is spurring interest in investing in ESG impact bonds.
The alternatives in the US
From a corporate bond perspective, Bentley believes an active investment approach could help investors identify positive opportunities that passive managers would be more inclined to overlook. As an example, he points to the United States, where recent problems in the regional domestic banking sector led to significant investment outflows, even from some banks with solid balances and healthy underlying fundamentals.
“There are US entities known as super-regional banks that, if they were in Europe, would most likely be considered ‘national leaders’ given their size and capabilities. These banks serve large areas of the United States, but not necessarily the entire country. More importantly, they don’t typically have potentially risky investment banking operations, he says.
From other independent firms such as Atlantic Capital, this stratum of relatively large US banks falls between the largest banks and smaller regional banks, and enjoys stricter regulation, less dependence on interest margins, and loan portfolios. more diversified than smaller regional banks.
“Investors have historically viewed these banks as less risky than some of the larger banks and are actually well diversified without any real exposure to investment banking,” they say.
The fact that its name included the word “regional” at a time when many were concerned about the regional banking crisis, led to the liquidation of the securities of several of these banks. However, after close and careful analysis, we believe that this group of banks looks cheap and may be less risky than other alternative banking sector opportunities,” he adds.
Globally, Bentley believes the emerging markets (EM) corporate debt market offers significant investment potential, driven by medium- to long-term market growth prospects and comparatively attractive yields.
“We believe we are in a growth environment that favors emerging markets over developed markets, and this positive growth dynamic typically generates inflows into the emerging market corporate debt asset class. “Net leverage remains lower in emerging market corporate debt than in developed investment grade and high yield debt, and yields are at their most attractive levels in decades,” he concludes.