Exploring opportunities and risks in fixed income markets (2024)

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What could 2020 bring for fixed income investing?

04 Mar 2020

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Introducing Kevin Zhao, Head of Global Sovereign and Currency, Fixed Income

Kevin Zhao is the lead portfolio manager on all active Global Sovereign and Flexible Fixed Income Strategies as well as Active Currency Management. In this role he is responsible for all investment decisions taken for and implemented in these strategies. He is a member of the Fixed Income Investment Forum, and joined UBS Asset Management in 2011.

We delve a bit deeper in our second mini interview with Kevin Zhao (Head of Global Sovereign and Currency, Fixed Income) to find out what he believes the impact of low interest rates will be on fixed income investments. He also discusses where the pockets of opportunity can be found.

Watch this space for the next in this series of interviews with Kevin on global flexible fixed income insights.

Macro environment / FI markets

Q: Where do you see the best opportunities in fixed income markets globally in 2020?

A:For 2020, we are focused on relative values and monetary policy changes outside of the G7 as we believe that the Fed, ECB and BoJ are likely to keep policy unchanged for the next few months at the least. However, we think that central banks in Canada, Australia and New Zealand are more likely to cut rates in the developed world. At the same time we see ample opportunities in some emerging markets where growth and inflationary pressures have been weak and their central banks still have plenty of room to cut rates. Examples include Mexico, China and to a lesser extent in South Africa, Russia, India and Turkey. We have recently moved some of our holdings from investment grade corporates to investment grade securitized bonds in the US. Spreads are slightly wider for similar ratings, while sensitivity to a recession or rising defaults is lower.

Q: What are the main risks for fixed income investors and how are you positioned to hedge them?

A:If developed market economic growth in 2020 proves higher than consensus, then this might pose a challenge for fixed income investors. For example, an unexpected and significant fiscal stimulus or higher wages and inflation could push bond yields higher, resulting in negative total returns for index-based bond investors. We believe that the most effective hedge is to own at least some inflation linked bonds and to under-weight countries where fiscal policies are turning very simulative. The spreading of coronavirus has made any material upside surprise in global growth very unlikely for 2020, though possible for 2021 if we will see coordinated global policy reflation.

There are also downside risks to the global economy; for example an unexpected recession in the US or certain outcomes in the November election. And recent events demonstrate that there are risks posed by more left-field events such as a renewed trade war, escalation of Middle East tensions or disruption to travel. In these more extreme events the best hedges may be 30 year US Treasuries and bonds issued by countries with limited scope for fiscal expansion, for example New Zealand.

Over the past few weeks, the coronavirus has spread significantly to many other countries especially in a few areas such as South Korea and Northern Italy that are major parts of global supply chains. This has led to significant downside risk to the near term global growth, but more importantly has unleashed significant market reaction, resulting in falling equity markets and EM assets which may in turn tighten financial conditions and worsen further business confidence.

Want to know more about flexible fixed income investing?

Read more about how flexible fixed income investing can help you navigate potentially volatile fixed income markets yet take advantage of opportunities as they arise

Read more on our flexible fixed income capabilities

Coronavirus has become a global issue.

How will it affect the world economy and what does it mean for investors? Our global investment teams explain in an extensive update.

Read moreabout Coronavirus has become a global issue.

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I am an expert in finance and asset management with a deep understanding of fixed income investments. My expertise is demonstrated by my extensive knowledge of financial markets, investment strategies, and the impact of economic factors on fixed income portfolios.

Now, let's delve into the concepts mentioned in the provided article about fixed income investing, featuring Kevin Zhao, Head of Global Sovereign and Currency, Fixed Income at UBS:

  1. Introduction of Kevin Zhao:

    • Kevin Zhao is the lead portfolio manager for active Global Sovereign and Flexible Fixed Income Strategies, as well as Active Currency Management at UBS Asset Management.
    • He joined UBS Asset Management in 2011 and is a member of the Fixed Income Investment Forum.
  2. Focus for 2020:

    • Kevin Zhao emphasizes a focus on relative values and monetary policy changes outside of the G7.
    • Predicts that the Fed, ECB, and BoJ are likely to keep policy unchanged, while central banks in Canada, Australia, and New Zealand may cut rates.
    • Identifies opportunities in emerging markets like Mexico, China, South Africa, Russia, India, and Turkey.
    • Shifts some holdings from investment-grade corporates to investment-grade securitized bonds in the U.S.
  3. Risks for Fixed Income Investors and Hedging:

    • Identifies the risk of higher-than-expected economic growth in developed markets in 2020, potentially pushing bond yields higher and resulting in negative total returns.
    • Recommends owning inflation-linked bonds and under-weighting countries with simulative fiscal policies as effective hedges.
    • Mentions downside risks such as an unexpected U.S. recession, outcomes of the November election, and left-field events like a renewed trade war or disruptions to travel.
    • Suggests that 30-year U.S. Treasuries and bonds from countries with limited fiscal expansion scope may serve as hedges in extreme events.
  4. Impact of Coronavirus on Global Economy:

    • Notes the spread of coronavirus to countries like South Korea and Northern Italy, affecting global supply chains.
    • Highlights significant downside risks to near-term global growth, leading to market reactions like falling equity markets and tightening financial conditions.
  5. Flexible Fixed Income Investing:

    • Mentions the benefits of flexible fixed income investing in navigating potentially volatile fixed income markets and seizing opportunities as they arise.

In summary, Kevin Zhao's insights cover global economic trends, monetary policies, emerging market opportunities, risks in fixed income investments, and the impact of external factors like the coronavirus on financial markets.

Exploring opportunities and risks in fixed income markets (2024)
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