Choppy Water Remains for Fixed Income

By Emily Lai

The world is entering divergent times with the US facing a tightening situation, while the rest of the world is still bound to cut rates. Regina Borromeo, Portfolio Manager at Legg Mason Brandywine Global Investment Management, believes the market will be more volatile in the second half of the year. High yield bonds are still a preference, but have to be chosen with care.

Borromeo remains positive on global high yield market trends. In 2014, non US$ issuance of bonds rose to a record level, but default rates are still muted with US, EU and Latin America HY all under 5%. Maturities have now been pushed out, peaking in 2020, and distressed ratios for US, EU and Emerging Market HY are all falling with declining EM market stress.

New issuance of EM corporate bonds has slowed down this year from US$ 321bn to US$ 76bn, the overall outstanding amount of US dollar dominated EM bonds stood at US$ 1694bn. Most of the EM sovereign and corporate bonds are in the BBB grade, which shows the potential risk of some fallen angels if they are to be downgraded, especially if commodity prices drop further. The risk is amplified in the energy sector with 35% of outstanding EM Energy Sector bonds rated in the BBBs.

Borromeo is closely monitoring the Chinese real estate market, but does not hold any Chinese property bonds for now as she wants to wait and see if the government and PBOC can implement policies that help the market survive through the property market correction. “Traditionally property market corrections can be very messy, but there is also an opportunity that China can do it in a more orderly way than other countries because of the more controlled system,” she forecasts. “But we can’t have full faith that policies are always out at the right time.” Borromeo is waiting for the market to get cheaper before including it in her portfolio. BM