Global opportunities in fixed income

Global developed markets rates at above 10-year averages present attractive opportunities

As Fed policy normalization nears its conclusion, U.S. rate markets have settled into a trading range characterized by ambiguous directionality.

In this backdrop, we believe global bond markets stand out as an attractive source of alpha and diversification for U.S. dollar investors.

Global central banks have tightened policy rates in the past year alongside the Fed, but the pace and magnitude of their actions and corresponding market pricing has overshot macro fundamentals. Markets are pricing in higher yields relative to levels implied by fundamentals and historical trends across many economies outside the U.S., including the UK and Europe.

Historically elevated global yields and carry compel strategic allocations outside the U.S.

The historic repricing of fixed income assets over the past year has lifted global yields to decade highs. As the catalysts behind 2022’s negative moves moderate this year, we believe the macro backdrop is primed to benefit global fixed income assets.

Europe and Emerging Markets (EM), such as Brazil and Mexico, now offer attractive valuations for US dollar investors, with favorable fundamental and technical factors.

Higher carry on the European assets is complemented by an attractive pick-up in yield when USD-hedged, driven by rate differentials (e.g., ~2% yield pick-up hedging back to USD from EUR). Meanwhile, a peaking dollar may enable room for outperformance of selective EM bonds and currencies.

High quality global credit presents unique relative value opportunity

The Great Moderation, a period of steady growth and inflation has ended, calling for a structural shift in asset allocations to high quality credit to weather expected weaker growth ahead.

A global opportunity set that is anchored* in USD but seeks to take advantage of cross-currency relative value, is well positioned given higher global yields, carry, and rising dispersion in credit performance.

Higher diversification away from domestic markets and local idiosyncratic risks, such as the U.S. regional banks failures, enable U.S. investors to reap alpha from versatile credit sources in a flexible and risk-aware manner.

*USD represents ~70% of the benchmark

Targeting better outcomes

• Flexibility in navigating diverse market environments: broadest fixed income universe creates opportunities across high quality government and spread sectors globally.
• Diversified risk-adjusted returns: lock-in liquid, diverse and high quality global government bond yields that may offer downside mitigation and stability during market volatility.
• Capture global credit alpha: target attractive returns via active sector & issuer selection to maximize global relative value opportunities in a high quality, liquid corporate credit universe.