Oliver Eichmann explains how he suffered in 2022 with the tremendous collapses in bond prices that caused double-digit losses in the most conservative portfolios. The outlook has changed a lot since then, and the most cautious investors have been recovering for many months (even despite the fateful month of October experienced by this asset). Now the wind is blowing in favor of bonds, explains the head of the Fixed Income segment at DWS.
France’s deficit problems have led the country’s sovereign bond to hit 3.35% this year. Could this situation lead to a debt crisis in France and affect other European countries?
Investors are demanding a risk premium from France for having assumed extraordinarily high budget deficits. Rating agencies responded by moderately readjusting their assessment of the country’s credit quality. But we are not concerned about the debt sustainability of French government bonds or that of any other sovereign state in the Eurozone. […]. We remain overweight in Spanish and Portuguese sovereign bonds in most of our portfolios, which shows that we are not worried about this possible crisis. We like Spanish government bonds mainly for reasons of to carry; We don’t see that there is such potential for differential adjustment, but our economists like Spain because of its macroeconomic outlook and fiscal situation. This is reflected in the rating agencies and in the markets. He momentum it looks good.
Regarding corporate debt, which sectors or companies do you find most attractive?
Regarding investment grade, we are positive on corporate bonds in general, leaving aside sector differentiation; We believe it is possible to adjust the gap further. But like this rally shrinkage of the spreads has been going on for a while, we could see another 10 or 15 points in terms of adjustment compared to the pack or to reference bonuses. We will then have reached its fair price, where it might still make sense to be overweight. Quality investment benefits from the cycle of falling rates in its favor. Our base case scenario is that the ECB lowers them to 2.25%. On the other hand, in all eurozone countries, we do not consider a strong recession to be a highly probable event. There are good arguments to continue to believe that corporate bonds could perform well.
And what about “high efficiency”?
In high performance, the situation is a little different. The extraordinary performance we’ve seen since the start of the year makes the market a little more vulnerable, so from a risk-return perspective, from a short-term tactical perspective, we see the risk of expansion of spreads and perhaps we will benefit from better entry points into the high-performance European market. We should also not neglect, even if it is not our base scenario, that there is a certain risk of recession, as well as geopolitical risks and that high yield is probably the most susceptible to these problems.
Regarding issuers, which sectors do you like the most?
We don’t like any particular sector, although for some time we have been overweight the financial sector, which already has a high weighting in most indices, but we still remain very positive about it. We believe there are good reasons for these bonds to outperform the market.
And apart from bank bonds, what seems interesting to you?
In our global portfolios, we can buy all asset classes; We are not limited to corporate bonds. In these portfolios we have a very high weighting of investment grade credit, and within this portfolio we find a high percentage of debt from banks and insurance companies. This year there is not a single sector – as happened in 2023 with real estate – that, from a macroeconomic point of view, we should avoid. Yes, we are a little more cautious in the more cyclical sectors. But if a major issuer in a cyclical sector – say the auto sector – offered an attractive new issue premium, there would be no reason to have too many reserves. This year, some issuers have regained access to the market and are extraordinarily strong in new issues, which has been a good opportunity for us: we have been able to modify portfolio positions and be more agnostics with sectors, looking only at which bonds are the most attractive. Beyond investment grade, we appreciate, due to the possibility of narrowing spreads, the covered bonds (covered bonds), or supranationals, such as European bonds, which could perform well compared to German or Dutch sovereign bonds. They have very high credit quality.
How much have they extended the duration of their portfolios?
Since the start of the year, we have been positive over time. Most of our portfolios are overweight on the 5 to 7 years of the curve. We are a little more cautious in the very long terms, whereas in the short term everything is already priced.
What do you think of China?
We have been very cautious with this country because of its political and economic problems and what has happened in the real estate sector. Additionally, for many of our portfolios, it is difficult to invest in China for ESG reasons. [ambientales, sociales y de gobierno corporativo]. This bond market cannot be compared to a developed market. We recently saw a rally in the Chinese bond market, but the reasons are not yet very clear. This doesn’t have much value, in our opinion. We find more attractive opportunities outside of China.
Or?
In Indonesia (public debt); and in Eastern Europe, Romania is attractive due to its risk/return profile. There is a risk that they will be downgraded to junk bonds, but we believe this is reflected in the price. In markets like Poland or Bulgaria, we find some issuers, for example public entities, which offer decent yields compared to sovereign bonds.
