The war against inflation waged by central banks has left fixed income managers somewhat clearer to find opportunities that offset the risk already assumed in some segments of debt. There may still be surprises and caution rules when taking positions, but the rises in interest rates are here to stay and are producing a rise in the profitability of fixed-income assets.
With this scenario, fixed income managers have begun to reorient their strategies, lengthening the duration of the portfolios and using the liquidity that in some cases had come to represent up to a third. They are finding opportunities in all segments, even in high yield or high yield issues, although in general they prefer those denominated in euros.
“We come from very low durations, even negative, and we have increased them, mainly in the long terms of government debt, where we see movements more limited, given the level of interest rates at which they are. In Europe we can still see more rises in the short-term than in the US, taking into account the increases that are discounted by central banks and inflation levels.
We have reduced exposure to inflation-linked bonds and have exposure to those currencies that have been greatly devalued. We have also increased short-term credit”, comments Verónica Serrano, from BBVA AM’s fixed-income management team, which has several of its funds among the best performers of the year, managing to reduce losses more than its Spanish competitors ,among which is theBBVA Flexible Duration Bonds , which with a 0.39% return is the only one that can boast of being on positive ground.
Rafael Valera, CEO and manager of B&H Bonds , explains that they have also lengthened the duration of the fund’s portfolio, reaching 2.4 years. “We have remained practically illiquid, with a 30% weight in investment grade and 22% in subordinated debt. We see more opportunities in European high yield corporate credit, especially in sectors such as tourism, oil, cars and banking, but in all very selectively. In our view, sovereigns offer still very high prices and extremely negative real rates relative to inflation,” he stresses.
Among the main positions of the fund, there are two investment grade issues of the airline Wizz Air, which in his opinion “enjoys a comfortable financial position, but is suffering from market fears regarding the evolution of air travel”; a subordinate of Cajamar, “one of the most solvent Spanish entities from which, however, a yield that exceeds double digits is being demanded”, and secured bonds (backed by the company’s assets) of OHLA, which ” cannot distribute dividends until they are due,” he explains.
David Ardura, director of investments at Finaccess Value , points out that they do see opportunities in sovereign debt, especially in the longer tranches. In the case of credit, he assures that current spread levels have historically been a good entry point for investors in private fixed income. “We can see higher spreads, but we are already at levels where the return/risk ratio is beginning to be considered interesting. Right now a two-year BBB non-financial corporate bond in euros offers a return of over 2% and a BBB financial, in the same period, pays 2.75%. They are interesting returns given the short term of the investment that is being made, “he argues.
With respect to high yield, this relationship widens considerably. “High-yield funds with durations of less than three years have internal returns of 7.5%-8%, a sufficient return cushion to absorb sharp widening in spreads over the next twelve months and still continue to make money. It is true that it is an especially sensitive asset in times of economic contraction and that the risk of default on this type of debt increases, but a sufficiently diversified portfolio is capable of distributing this risk efficiently”, he points out.
In Trea AM they also apply a similar strategy. “In all types of debt assets there are opportunities at the moment, from bonds to senior paper, subordinated and also in high yield with very attractive returns,” says Ascensión Gómez, director of fixed income at the manager, for whom there is no risk in short-term papers, of less than 2 years, with yields above 2%. “There is banking paper from second-tier entities, with good and improving fundamentals. In other words, they will most likely have a rating increase, lasting between 3 and 4 years with returns of around 8%, which we find very interesting,” she emphasizes. .
Daniel Martínez, fixed income manager at Gesconsult , points out that they have applied the first commandment of fixed income: that it is only fixed if it is expected to expire. And with this rule in mind, they are being very cautious when selecting issues, such as CoCos from banks with attractive returns. “Financial institutions have learned the lesson of previous crises and now have capital buffers that they provisioned for Covid that represent an excess of between 300 and 400 basis points, which allows them to face the first impact of a possible default. And the AT1 are reflecting this situation,” says the manager.