A key driver will be the renewed ‘low for long’ theme in developed market interest rates, resulting in what we expect to be modest returns for government bonds.
For corporate bonds, we expect some bifurcation within developed markets, with a split between companies that are in scope of central bank support programmes, and those that aren’t. This creates strong incentive for companies to maintain their investment grade ratings in order to benefit from lower coupon rates and cheaper funding.
Companies not in scope will be challenged. Funding difficulties will magnify concerns with lower quality bonds, adding to industry-specific issues (for example in retail, leisure, transportation and energy).
Regionally, we see relative value in Asia, where yields have increased. This preference is also driven by the region’s effectiveness in coping with the pandemic, along with a rapid monetary and fiscal response. Asian markets have more latitude to digest rises in public deficits and are better equipped for the current environment due to social discipline and broad use of technology.
Credit selection remains crucial however, given divergent paths of companies and industries.
Within the high yield space, our preference is for US over Euro. We expect greater challenges to economic growth recovery in Europe, which has had a more wide scale spread of COVID-19 infections, along with more constrained public finances to support growth recovery compared to the US.