Head - Fixed Income Strategy
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We revisit the outlook for fixed income in Europe in light of the market shakeout, highlighting where we see value.
Just like the rest of the world, the COVID-19 impact on economies, markets, and investor sentiment has punched European fixed income markets hard. While a 1.0% year-to-date loss on the Bloomberg Barclays Euro Aggregate Index seems great relative to other regions, it still includes a 7% drop in early March. Unfortunately, with the exception of sovereign bonds (most of them anyway), all European assets are now firmly in negative territory for the year.
Central banks and governments have announced numerous monetary and fiscal programs. The European Central Bank (ECB) bond purchases are likely to offset a meaningful increase in government bond supply. Though Italy’s fundamental programs are of concern, ECB intervention is likely to keep Eurozone (EZ) rates low and spreads tight.
As the dust settles from the recent fire sale in global bond markets, dislocations have become noticeable in corporate credit. However, we recognize risks have risen for others. Investment grade (IG) corporate spreads have not bounced back like other assets, which reflects investor angst over BBB-rated debt and potential downgrades. We favor an up in quality bias, taking advantage of wider spreads in higher rated corporate bonds. Additional Tier 1 securities offer long-term value.
Read Fixed Income Strategy.