Asset managers expect credit spreads to be range-bound or to continue to tighten. They are on the lookout for catalysts that can dent risk appetite, increase volatility and provide entry points, while remaining cautious on valuation and interest rates, in the context of US rate hike and potential eurozone deflation.
The 2014 rally in interest rates has been the biggest surprise for global fixed income managers, particularly for those with underweight duration positioning, whose funds' performance has suffered as a result. Funds that managed to offset negative duration impact by positive credit selection and allocation, particularly in high beta sectors, were out-performers.
"M&A activity, weaker bond structures, higher disparity of returns and recent defaults such as Esperito Santo, Phones 4U, coupled with persistent fears of high-yield market selloff reminded investors that there is little room for complacency in credit," says Manuel Arrive, Senior Director in the Fund and Asset Manager Rating team.
The need for incremental yield continues to drive asset managers down the credit curve. In investment-grade, barbell strategy (overweighting higher-yielding 'BBB'/cross over and 'AAA / AA' sovereigns) was favoured. In HY, overweighting lower credit quality names (eg 'B' vs. BB) was a popular trade. Overweight subordinated versus senior bank debt was also a widespread, more successful trade.
HY redemptions in the summer were the highest since June 2013, despite fundamentals remaining solid. Outflows were driven by fears of a market drop triggered by a rise in US interest rates or geopolitical risks and were exacerbated by poor liquidity.
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