BNY Mellon Investment Manager Says Global Macro Risks Have Diminished and Securities Selection Becomes Increasingly Important
High yield bonds, global corporate bonds and emerging market debt are among the areas of opportunity for fixed income investors in 2013, according to Standish Mellon Asset Management Company LLC, the fixed income specialist for BNY Mellon.
Standish's observations recently were published in Security Selection and Liquidity Key for Bonds in 2013, Standish Global Bond Market Outlook.
The report notes that Standish believes global macro risks have diminished over the last year. "Hopefully, we are moving from a market dominated by fear to one where fundamentals once again drive returns," said David Leduc, chief investment officer for Standish and the author of the report.
The report cautions, however, that returns are likely to be lower for fixed income in 2013 than they were in 2012. It cites the potential for rising inflation. It also notes that current low yields could significantly reduce the potential for capital appreciation.
Standish expects global growth will be muted in 2013 as developed economies continue to deleverage and inflation remains in check. This would normally provide a favorable environment for fixed income investments. However, Leduc added, "We believe valuations have become stretched in a number of sectors, so investors will need to be in the right sectors and in the right securities. An important driver of excess returns will be security selections within the sectors."
One factor expected to drive emerging market local currency debt will be strengthening in some Asian and Latin American currencies as better economic fundamentals attract capital, according to the report. In global corporate credit, Standish said it favors high yield over investment grade bonds, as there appears to be less room for price appreciation because of economic fundamentals.
Standish also said some sovereign debt in the European periphery could provide opportunities, as the European Central Bank has taken steps to reduce the possibility of a eurozone breakup.
Other areas, such as U.S. Treasuries and German bunds, could become more vulnerable to inflation, the report said. Standish notes that the inflation threat to these investments could rise as investors begin to anticipate more stable economic activity in the second half of 2013.