Fixed income managers explain their portfolio positioning following a volatile half year, and how they are taking advantage of opportunities in the sector while negotiating challenges including political uncertainty and 'lower for longer' bond yields.
Mike Riddell, senior portfolio manager, Allianz Strategic Bond fund
Long US dollar
The Brexit referendum created some superb opportunities in global fixed income and the fund has been very quick to take advantage with its global unconstrained approach.
Coming out of the referendum and into the second half of 2016, the fund was what I would call 'long risk' overall. It had overweight exposures to credit and peripheral government bonds and overweight inflation-linked bonds, and initially was bullish high beta currencies like the Mexican peso and Australian dollar.
This is the total opposite of the beginning of June, when we did not think Brexit was remotely priced into markets and were positioned accordingly.
We were also long duration post-Brexit, despite the bond rally, since central banks will ease policy in the face of turbulence. Some opportunities post the referendum have partly played out, since basically everything has rallied very quickly, and we have scaled back some of these positions put on immediately post the referendum.
The biggest immediate risks for the fund given current positioning are that US inflation climbs faster than expected, and Japan embarks on some form of helicopter money, which could give bond investors a fright.
But these risks are also opportunities, and we have switched to a long US dollar position (as Fed rate hikes could come back onto the agenda) and we are running a short in the Japanese yen. We have also upped our US TIPS exposure.
James Foster, fund manager, Artemis Strategic Bond fund
High yield
At first glance, the risks may appear to outweigh the opportunities. But remember, (moderately) bad news for the economy can actually be positive for bond markets.
For example, should the Brexit vote lead to a slowdown in the economy, the Bank of England's response could be to cut interest rates. That would be positive for bonds.
The consequence of populist politicians being elected across the globe is likely to be lower growth, lower interest rates and more QE. And that should tend to be supportive for higher yielding bonds.
Meanwhile, companies in the UK are likely to pause or reduce their investment programmes until they have greater certainty about what happens next - and that will no doubt slow growth. But slow growth is exactly what bond markets like.
We are increasingly positive about high yield bonds. The European Central Bank continues to print money and is buying investment-grade corporate bonds in the secondary market. This drives their yields lower, thereby forcing yield-hungry investors into the high yield market.
The US economy, meanwhile, is performing reasonably well, keeping defaults low.
In fact, because oil prices have recovered somewhat, we would expect default rates among energy companies to fall over the coming months, creating a positive climate for the wider high yield market.
Craig Veysey, head of fixed income and manager, Sanlam Strategic Bond fund
Selected financials
We expect core government bond yields to remain in the low range of recent months through the remainder of the year, with a reasonable probability they will go lower still in the near term. There now seems only a relatively small possibility for yields to rerate substantially higher given weak global growth and still low inflation expectations.
Interest rates are low for good reason, and central bank buying in the eurozone and Japan, and probably in the UK very soon, is a strong force capping yields.
We advocate being more active than usual at such low yield levels, in adding and reducing duration of a government bond portfolio within the anticipated yield range.
With low interest rates set to continue, accompanied by low yields of high quality core government bonds, then corporate bonds with their yield advantage can see further investor interest.
This is particularly so in the financial space, which we see as the most attractive sector within the investment grade and higher quality end of the sub-investment grade bond universe.
Here an investor receives in most cases an excellent yield still in combination with good capital ratios of the issuer by historical standards.
In particular, many of the old style subordinated bank instruments are particularly appealing when combined with often high back-end spreads, that makes it very likely that these will be called or tendered for at the first opportunity.
