As the covid-19 pandemic begins to show signs of slowing, professional investors are looking for the best strategies to achieve a return on their investments. In light of the uncertain global economic landscape the past year has presented, however, many are approaching their options cautiously. Some are seeing a potential in negative interest bonds, which reached a record-breaking high of 17-trillion in November of 2020. We spoke to Clément Perrette, senior fixed income fund manager and co-manager at the Ram Global Bond Total Return fund about the current opportunities afforded by fixed-income bonds, along with any risks investors may encounter.
With over 25 years experience working inside Europe’s capital markets, French fixed-income bond expert Clément Perrette, is no stranger to asset management. As Senior Portfolio Manager, and Managing Director at RAM Active Investments, he has leveraged his decades of expertise to help build long-term financial growth opportunities for the company. In addition to creating continued financial growth, he has also pivoted his role to dedicate more time toward environmental causes. RAM funds proactively includes robust data driven ESG standards for all investments selection process.l
We asked Perrette to provide insight into the wider economic trends behind the current state of fixed income bonds, along with how investors should best approach finding a yield in this asset class.
Fixed income bonds include government, corporate, mortgage, municipal, or high-yield bonds, and are set at a fixed rate of interest and at a specific term. During the term, interest is paid and investors redeem the total value of the bond at maturity. For many investors, the benefits of fixed income funds lie in their broad diversification. While the pandemic was at its height, negative interest rate bonds achieved an all-time high of 17 trillion. These extremely low interest rates were largely an effect of the global economic fragility caused by covid-19, Countries like Switzerland ,Japan and the all Eurozone area have had negative interest rates for an extended period of time, While they can present obstacles for investors, negative rates have the objective to reflate the economy. The debate is on to evaluate the impact of these rate policies on economic growth and – bond portfolio managers facing these environments need to to include alternative L/S strategies or broader risk diversifications if they want to achieve positive returns.
Historically, zero or negative interest rates coincide with active reflating monetary policies, like what was seen in the United States during 2018. Exciting these strategies have proven to be somewhat challenging, especially in situations where mounting debt levels put both nations and corporations under pressure and lower their credit metrics. To ensure these policies don’t continue to carry negative, long-standing effects on the market, central banks will have to pivot toward a robust exit strategy from these accommodative policies.
While businesses and individuals have benefited from these policies in terms of lowering unemployment, these expansionary policies also tend to increase the valuations of financial assets hence exacerbating wealth inequalities This means that investors who already had significant exposure to the markets have benefited most from these monetary policies , making it much easier for the wealth gap to grow. In essence, the wealthy have gotten wealthier, while people in lower income brackets have only gotten poorer since assets such as real estate for example, are getting out of reach for low income savers.
Additionally, these policies are distorting asset valuations, which can ultimately attract investors into assets with very little real value. This can unfortunately create violent corrections in the market as uncertainties over value increase, and make it much more difficult for investors to get a good read of the market.
As Perrette explains, RAM Global Bond Total Return follows a top-down discretionary process, which allows the fund to select opportunities that present an attractive risk-return profile in the current macro economic environment. . Through these strategies, the company reduced its credit risk and was in a prime position to seize opportunities when the pandemic first hit in March 2020. Perrette notes that during this time, a proactive strategy that took advantage of the current federal and central interventionism seemed to be the best way to move forward.
From Clément Perrette’s perspective, the main short-term risk professional investors face is the potential withdrawal of support from central banks. In areas like Europe It might seem a distant risk, but a much closer risk in the US with the Fed already preparing the market. Looking ahead toward the long-term, investors will want to watch out for rising inflation, which would in turn produce an increase in rates, creating a negative impact on the valuation of these bonds. Historically however, low interest rates can last for a long time, provided there are various structural supports in place, such as high debt and an aging population, like Japan, for example. As it stands, a flexible approach is the best approach when looking for opportunities in global fixed-income markets.
Despite mounting risks due to stretched valuations investors are currently flushed with liquidity, and have the means to continue their search for yield. Even though interest rates are currently low, many have still managed to find a positive return, and more will still when monetary and fiscal support structures subside. Given current valuations Perrette advises investors to lighten credit exposures in both investment grade bonds, and high-yield markets. Additionally, he notes that balance is key, and it’s important to strike a harmony within profiles between credit risk and duration risk to ensure the best possible outcomes.
Moving forward, the Fed and Canada central bank will probably be among the first to reduce these extremely accommodative rates policies. Given current valuation it is probably wise to reduce credit exposures but economic recovery and still supportive central banks are clearly positive and we recommend adding in market corrections.
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