Market meltdown: finding the opportunities in fixed income

22nd January 2016


It is not just equity investors that have been suffering this week, 2016 hasn’t been an easy ride for fixed income investors either.


2016 had been a tumultuous year for markets and only three weeks in investors have had to contend with tumbling oil prices, policy moves from China, conflicting indicators of Chinese economy growth and fears of slower global growth.


Marilyn Watson, head of unconstrained fixed income product strategy at BlackRock, said while the focus has been on equities, it is not just stockmarkets affected.


‘While many of the news headlines have focused on the poor performance of equity markets, the impact on bond and currency markets has also been significant,’ she said.


‘Credit markets, high yield and emerging markets have sold off year to date, while so-called risk-free rates, such as US treasuries, UK gilts and German bunds, have rallied. In addition, we note the huge surge in the volatility of currency markets.’


A press conference by the European Central Bank (ECB) saw it announce it was keeping its stance on monetary policy but hinted at further QE and room for another interest rate cut.


However, Watson noted ECB president Mario Draghi’s comments on increasing economic downside risks ‘amid uncertainties about emerging market growth prospects’.


Watson said the announcement that the ECB will reassess its position in March is ‘in our mind effectively pre-committing the ECB to ease further sometime this year’.


In order to ride out the difficulties in the market’s Watson is long on Spain but short on Italy.


‘We remain positioned with a long Spain versus short Italy relative value trade and, on a longer-term fundamental basis, retain our preference for Portuguese government debt,’ she said.


In the UK, Watson is taking note of Bank of England governor Mark Carney’s speech that dampened market expectations of a rate rise this week.


‘We are positioned with a UK curve flattener and believe that economic fundamentals still point to a rate rise this year,’ she said. ‘We are also long sterling versus the euro. The pound has tumbled this year and, based on both fundamentals and valuations, we believe this depreciation is excessive.’


Watson admitted that times were tough further afield in emerging markets but there were still opportunities.

‘While this is proving to a tough environment for emerging markets, we continue to see idiosyncratic opportunities in both rates and FX,’ she said.


‘A relatively long-standing view, India still remains one of our favourite positions, where we are long local currency Indian government bonds and Indian banks and are also long the Indian rupee. Elsewhere, given the recent volatility across emerging market currencies, we have reduced some of the US dollar short exposure in our long emerging market currency basket.’


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