Investment Desk Bulletin

20 September 2016

Fixed Income: Reasons to be cheerful

IDB 20 09 16

By Sanjay Joshi & Craig Shute

In this week’s IDB, we look at fixed income and consider some reasons to be cheerful. In the first half of the presentation we reflect on the abnormally low yield environment, while the second half revisits our strategic view on Bank debt.

- Despite nerves over possible increases to the Fed funds rate, the regime of abnormally low yields looks set to persist for some time. Subdued growth and well anchored inflation expectations will keep rates low, economic conditions necessitate that low real rates promote investment and consumption. Further to this, demand for fixed income from central banks, pension funds and insurance companies is strong and this sustained appetite for bonds will keep yields low.

- Bank bond exposure has been at the core of our fixed income asset allocation for several years and we still believe it offers strategic long-term value. The regulatory environment that underpins our view continues to evolve, and this regulatory straightjacket will strengthen bank capital and leverage ratios. Recent caution towards CoCo debt has abated following clarification from the European Banking Authority that coupon payments will rank above bonuses and dividend distributions.

- Financials still offer attractive yields, especially in a low rate environment, but a focused approach needs be taken and position sizing needs to reflect individual bank risk and characteristics.