Trade risks are complicating the picture for bonds

Trade risks are complicating the picture for bonds

20-07-2018 | Quarterly outlook

The trade war threat and political risks in Italy are reasons to remain cautious on bonds. Fred Belak, Head of Robeco’s Global Fixed Income Macro team, expects bond markets to consolidate ahead of the November US elections. He is underweighting credits and remains cautious until spreads widen further.

  • Fred Belak
    Head of Global Macro

Speed read

  • Shrinking US dollar liquidity
  • Emerging debt valuations are starting to look attractive
  • Scarcity of German government bonds could be a meaningful technical

“The US tax cut plan and the push to reduce regulatory burdens are providing strong stimulus to the US economy,” says Fred Belak. “With growth accelerating towards 4% in the second quarter, the economy at or near full employment and personal savings rates declining to low levels, the cycle can be extended with a boost from a pickup in business investment.”

“As part of the tax cut plan,” says Belak, “corporations also received favorable treatment on their offshore cash, much of which was held in US dollars. This has contributed to a tightening of global USD liquidity as capital is repatriated back to the US. With the Fed already far along on its tightening cycle, we are now in the unusual situation where the global reserve currency is expensive to borrow and less freely available than in previous years. We expect this situation to continue at least until the US economy slows, which we don't forsee anytime soon unless there will be major trade shocks.”

“We are seeing a broad repricing of the US dollar higher,” Belak explains, “and on a rolling basis selective asset markets are being re-rated lower. In a normal cycle, with the risk-free global reserve currency offering more attractive yields, we would expect riskier assets to reprice accordingly as investors rebalanced their portfolios to hold safe haven bonds. This is not a normal cycle though, as central banks for years have shrunk the supply of sovereign debt to the point where yields were so low that investors were forced to venture out the risk curves to get yield.”

“So bond investor portfolios are riskier across the world than many would like, but investors are reluctant to rebalance to risk-free assets given the still low term premiums and absolute yield levels for most safe haven bonds outside the US.”

Emerging USD debt has widened enough to start to look interesting

“In the US, where the Fed stopped its Quantitative Easing (QE) program in 2014 and has begun Quantitative Tightening (QT), the process of rebalancing portfolios towards safer risk-free bonds is further along,” Belak knows. “Spreads in some markets, such as emerging USD debt, have widened enough to begin to look interesting. While fears of a trade war are affecting US investment grade credits a bit, strong domestic growth expectations have encouraged US investors to continue to overweight US high yield.”

“Likewise, the strong US dollar has also forced vulnerable emerging market countries to raise rates, as their currencies have weakened sharply. We think the emerging local currency bond market is also slowly getting more attractive. What we need to see to get more bullish on emerging markets is either an end to US rate hikes or, more likely, a re-acceleration in growth outside the US.”

“When we look outside the US,” Belak continues, “China's deliberate policy to gain more control of its financial system and deflate its credit growth that began in mid-2017 has begun to slow its economy as planned. This has predictably begun to impact Asian growth and Europe via trade linkages.”

Trade wars could get worse

Belak is more concerned about the risks of a sustained trade war than many other analysts. “Trump's popularity among Republicans is now close to 90%. His protectionism clearly plays well with a large part of the Republican base. This makes it attractive for Trump to continue to pursue this theme into the November elections. As a result we have moved to a neutral stance on Treasuries. Should equities sell off sharply, we would be comfortable establishing an underweight position if yields move much below 2.7%, as we continue to feel the growth stimulus in the US remains strong.”

The Italian elections and the response to the new coalition government has brought back old concerns that the Eurozone remains an unworkable currency union. “With risk premiums rising sharply in Italian debt in May and some contagion to other periphery countries, the ECB has once again moved to a more dovish stance pushing expectations for rate hikes even further out to later in 2019. We do not expect Draghi to raise rates before his term ends,” says Belak.

Scarcity of German government bonds might send yields lower

“The free float on privately held German bonds has shrunk to close to 10%. This has created a scarcity premium for AAA assets in Europe, with Bund real yields now reaching negative 1.25%. Although the ECB has indicated they will end QE by year end, we believe the stock effect of their QE policies will continue to cap bund yields below 80 bps. Should the new coalition in Italy threaten the euro’s integrity, we believe the scarcity of privately held Bunds could lead to sharply lower and even negative yields.”

Given the extreme financial repression in Europe, the reduction in market liquidity, and increased political risks in Italy, recent spread widening is causing concern among bond holders across credit markets. “In our view, spreads are still not at attractive levels,” Belak concludes.

Global top-down investment framework for bonds

The figure summarizes the Global Fixed Income Macro team’s views on the attractiveness of government bond markets and specific fixed income assets, based on valuation, technicals and fundamentals.

Leave your details and download the report.


I agree to the Robeco Disclaimer and the collection and use of my personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy Policy, including for the purpose of direct marketing of Robeco products or services. Your data will be treated with utmost care and will not be passed on to third parties.

Important information

The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong.
This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing
This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions.
The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.

Subjects related to this article are:


1. General
Please read this information carefully.

This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.

2. Important risk disclosures
2. Important risk disclosures Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:

  • Some Funds are subject to investment, market, equities, liquidity, counterparty, securities lending and foreign currency risk and risk associated with investments in small and/or mid-capped companies.
  • Some Funds are subject to the risks of investing in emerging markets which include political, economic, legal, regulatory, market, settlement, execution, counterparty and currency risks.
  • Some Funds may invest in China A shares directly through the Qualified Foreign Institutional Investor (“QFII”) scheme and / or RMB Qualified Foreign Institutional Investor (“RQFII”) scheme and / or Stock Connect programmes which may entail additional clearing and settlement, regulatory, operational, counterparty and liquidity risk.
  • For distributing share classes, some Funds may pay out dividend distributions out of capital. Where distributions are paid out of capital, this amounts to a return or withdrawal of part of your original investment or capital gains attributable to that and may result in an immediate decrease in the net asset value of shares.
  • Some Funds’ investments maybe concentrated in one region / one country / one sector / around one theme and therefore the value of the Fund may be more volatile and may be subject to concentration risk.
  • The risk exists that the quantitative techniques used by some Funds may not work and the Funds’ value may be adversely affected.
  • In addition to investment, market, liquidity, counterparty, securities lending, (reverse) repurchase agreements and foreign currency risk, some Funds are subject to risk associated with fixed income investments like credit risk, interest rate risk, convertible bonds risk, ABS risk and the risk of investments in non-investment grade or unrated securities and the risk of investments made in non-investment grade sovereign securities.
  • Some Funds can use derivatives extensively. Robeco Global Consumer Trends Equities can use derivatives for hedging and efficient portfolio management. Derivatives exposure may involve higher counterparty, liquidity and valuation risks. In adverse situations, the Funds may suffer significant losses (even a total loss of the Funds’ assets) from its derivative usage.
  • Robeco European High Yield Bonds is subject to Eurozone risk.
  • Investors may suffer substantial losses of their investments in the Funds. Investor should not invest in the Funds solely based on the information provided in this document and should read the offering documents (including potential risks involved) for details.

3. Local legal and sales restrictions
The Website is to be accessed by “professional investors” only (as defined in the Securities and Futures Ordinance (Cap.571) and/or the Securities and Futures (Professional Investors) Rules (Cap.571D) under the laws of Hong Kong). The Website is not directed at any person in any jurisdiction where (by reason of that person’s nationality, residence or otherwise) the publication or availability of the Website is prohibited. Persons in respect of whom such prohibitions apply or persons other than those specified above must not access this Website. Persons accessing the Website need to be aware that they are responsible themselves for the compliance with all local rules and regulations. By accessing this Website and any of its pages, you acknowledge your agreement with understanding of the following terms of use and legal information. If you do not agree to the terms and conditions below, do not access this Website or any pages thereof.

The information contained in the Website is being provided for information purposes.

Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.

4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.

5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.

6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.

7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.

8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.

9. Privacy
Robeco guarantees that the data of persons accessing the Website will be treated confidentially in accordance with prevailing data protection regulations. Such data will not be made available to third parties without the approval of the persons accessing the Website, unless Robeco is legally obliged to do so. Please find more details in our Privacy and Cookie Policy.

10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong. 

Please click “I agree” button if you have read and understood this page and agree to the Disclaimers above and the collection and use of your personal data by Robeco, for the purposes for which such data is collected and used as set out in the Privacy and Cookie Policy, including for the purpose of direct marketing of Robeco products or services. Otherwise, please click “I Disagree” to leave the website.

I Disagree