Amid growing conviction that the Federal Reserve is undergoing a significant pivot, bond investors are actively seeking higher yields in unconventional corners of the fixed-income market. From century bonds in Austria to New Zealand’s quasi-sovereign securities, supranational debt, and even Pakistan’s hard-currency notes, fund managers at TCW Group Inc., Fidelity International Ltd., MFS Investment Management, and others are exploring niche trades to enhance returns in 2024.
Exploring Diverse Opportunities:
- Portfolio Diversification:
- MFS Investment Management and Vontobel Asset Management AG express optimism about debt issued by supranationals, organizations supported by multiple countries for specific policy objectives.
- Notes from the European Union and the European Financial Stabilisation Mechanism are identified as cheap relative value trades amidst Europe’s proximity to recession, providing diversification beyond euro bonds.
- Interest-Rate Sensitive:
- Ninety One UK Ltd. favors “safer” positions for the upcoming year, turning to New Zealand’s Local Government Funding Agency securities as part of its portfolio. The AAA and AA+ rated notes are seen as a strong sovereign bond exposure, benefiting from global yield reductions.
- Distressed Nation Debt:
- TCW Group and Mackay Shields endorse the hard currency debt of Pakistan, which secured an IMF deal to avert a sovereign default. The longer-dated notes are deemed to have additional upside potential as borrowing costs could decrease following the Fed’s pivot signaling.
- Price Recovery:
- Fidelity International adopts a contrarian approach, adding duration with an Austrian bond maturing in 2120. Bought at approximately 35 cents to the euro in October, the bet stands to double if global economic indicators signal a move towards a recession.
- Contrarian Trade:
- Bank of America Corp. suggests a defensive strategy by recommending a basket of five-year credit default swaps across emerging markets. This contrarian trade prepares for a potential shift in the narrative towards a hard landing, offering significant potential returns in a downside scenario.
