October 3, 2022

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Bonds: Europe or the United States, where the opportunity lies

After the worst semester in history for fixed income returns, there is an open search for possible opportunities. Investors are questioning whether it is better to take a stand on Europe (including the UK) or whether to look abroad, given the current context, which is characterized by high growth rates and slower growth. Which of the two areas is the maximum privilege? answer Fontobel Asset Management It covers not only the fundamental aspects of economists, but also the relative value and various characteristics of the transatlantic bond market.

With an energy crisis looming in Europe, the answer may seem obvious, and it is a strong allotment tendency for the United States. But we have to look closely. The contrasting economic environment in both Europe and the United States has led to the poor performance of European credit Compared to the United States recently, “but we believe who – which These two economies are more interconnected than the market is currently evaluating. – Warn George CurtisVontobel AM wallet management – both driven by consumption and either way Inflation is rampant“.

If the air was bad on the Old Continent, it certainly didn’t breathe any better in the United States. In recent days, Isabel Schnabel, a member of the European Central Bank’s Executive Committee, warned in an interview with Reuters thatEurozone economy slows down And a recession in the near future is not excluded, while the Bank of England predicted five quarters of deflation. However, the The US has already experienced two consecutive quarters of negative growththus entering the so-called technical stagnation, and in recent days some Federal Reserve members have declared that they are unable to bring down inflation without causing the economy to contract (this is the Minneapolis Federal Reserve Chairman Neil Kashkari, considered a pigeon, a dove).

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“So, for us, the decision to allocate between Europe and the United States, as always, comes down to the question of relative value on the basis of currency,” the expert specifies, adding another element of comparison, currency hedging. But not only.

Looking at the relative value in high-yield markets, it is interesting to note that the historical relationship between Europe and the US has softened considerably after the Covid pandemic. Between 2013 and 2021 – Curtis explains – The high yield in Europe traded on average about 60 basis points lower than the high yield in the USundoubtedly thanks to the hugely favorable monetary policy environment in Europe and the superior quality of the high European yield characterized by much less exposure to oil and gas.”

Since the beginning of 2022However, this relationship was reversed. European high yield, in fact, currently It is trading around 90 basis points higher than its US counterpart. Although part of this phenomenon is explained by the increase in short-term economic risks in Europe, there are other aspects to consider. “It is worth noting that the higher yield in Europe has a better rating (BB- vs. B + in the US) and a shorter duration (credit spread duration 3.4 years vs. 4.1 years) – the expert points out – moreover, the European historically high yield also has a rate of Defaults are much lower (1.8% vs. 3.5% in the US).”

Thus, the discussion of appropriation between Europe and the United States is much more complex than the basic geographical view of the respective economies.

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sure, “There will be good upward opportunities in both geographiesgiven that returns are well above the long-term average.” The rule to follow in both cases, remembers Vontobel AM, is to implement strict credit selection, and reduce exposure to energy-intensive sectors such as chemicals, paper and packaging, to focus instead On companies with strong pricing power.