- Fixed Income Strategist
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
With the US Federal Reserve’s (Fed’s) interest-rate-hiking cycle now underway, it’s an important time to keep a close eye on non-US buyers of US dollar (USD) fixed income securities. Historically, Japanese and European investors have been large participants in the space. But if the Fed continues to raise US rates as expected, the positive carry return1 that these investors have recently reaped from US Treasuries may turn negative because the Fed’s rate hikes will increase the cost of foreign-exchange hedging for non-US investors, particularly in Japan. Indeed, taking account of currency hedging, European fixed income could start to look more attractive than its US counterpart to Japanese buyers.
Figure 1 shows the spread of hedged 10-year US Treasuries versus 10-year Japanese government bonds (JGBs) in light blue and the spread of hedged 10-year German bunds versus 10-year JGBs in dark blue. Both lines use a 12-month currency forward, instead of the more commonly used three-month forward, to better incorporate the potential effects of the widely anticipated US rate hikes in the period ahead.
But, one might ask, wouldn’t additional Japanese flows into Europe then drive more European flows into potentially higher-yielding USD markets? Not necessarily. Notably, Germany has begun to move away from its traditionally austere budget views. Meanwhile, the European Central Bank is pivoting (albeit slowly) toward a more hawkish policy stance, with European interest rates having moved up substantially this year. Bund yields have already entered positive territory (as of this writing). We’ve even heard rumblings about possibly ending negative deposit rates in the eurozone at some point this year.
This is a very different environment from Japan, where the Bank of Japan has thus far generally been holding the line on negative rates and yield-curve control.
1Positive carry is an investment strategy that involves investing borrowed money and then earning a profit on the difference between the return and the interest owed. Investors commonly use positive carry in currency markets.
Spread the risk: Our top three fixed income diversifiers for 2023Continue reading
Can US bank loans “carry” investors through 2023?Continue reading
Take credit: Our five best credit market ideas for 2023Continue reading
Hidden in plain sight: Overlooked opportunities in investment-grade creditContinue reading
High-yield bonds in 2023: Fortune favours the patientContinue reading
Credit market outlook: Partly sunny with a chance of good valueContinue reading
Spread the risk: Our top three fixed income diversifiers for 2023
Fixed Income Strategist Amar Reganti highlights three types of strategies that may be well positioned to provide fixed income portfolio diversification going forward.
Can US bank loans “carry” investors through 2023?
Fixed Income Portfolios managers Jeffrey Heuer, CFA and David Marshak and Investment Director Nick Leichtman describe what they see as the most prudent approach to the bank loans asset class in 2023 and why.
Take credit: Our five best credit market ideas for 2023
Fixed Income Strategist Amar Reganti highlights credit market opportunities that he expects to arise over the course of 2023, against a backdrop of slowing growth.
High yield: Opportunity to pivot in 2023?
Our high-yield bond portfolio managers have a guardedly optimistic outlook on the market and believe security selection will be key to benchmark-relative outperformance in 2023.
Hidden in plain sight: Overlooked opportunities in investment-grade credit
Fixed Income Strategist Amar Reganti and Investment Specialist Geoff Austein-Miller highlight some relatively simple, straightforward ways to implement a positive view on high-quality corporate credit.
How to find potential in volatile European high-yield markets?
Fixed Income Portfolio Manager Konstantin Leidman discusses why European high-yield investors need to be ready for both further volatility and the emergence of new opportunities.
High-yield bonds in 2023: Fortune favours the patient
Amid ongoing dislocation in the high-yield market, Fixed Income Portfolio Manager Konstantin Leidman sees opportunities for investors to take advantage of potentially attractive valuations.
Credit market outlook: Partly sunny with a chance of good value
In his 2023 credit market outlook, Fixed Income Portfolio Manager Rob Burn highlights some potentially attractive opportunities in the wake of this year's market sell-off.