united kingdomen
Fixed income outlook: The autumn cluster

Fixed income outlook: The autumn cluster

09-10-2020 | Insight
A cluster of high volatility events will be taking place in the next six weeks. Ahead of that, we retain a high-quality bias, ready for opportunities to come.
  • James Stuttard
    James
    Stuttard
    Head of Global Macro team and Portfolio Manager, Robeco
  • Bob Stoutjesdijk
    Bob
    Stoutjesdijk
    Analyst
  • Michiel de Bruin
    Michiel
    de Bruin
    Portfolio Manager Global Macro Fixed Income

Speed read

  • Cluster of high-volatile events coming up with asymmetric possible outcomes
  • We retain a high-quality bias, ready for opportunities to come
  • Duration stays supported by central banks; differentiation key within EM
Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

By the time of our next Quarterly Outlook in December 2020, the future president of the United States should be known, we may see a market-friendly line up with the Senate, a UK-EU trade deal, several Covid-19 vaccines successfully passing Phase Three trials and ready for H1 2021 rollout, containment of the virus in those countries where it is currently flaring once again, and an associated reopening of economies ready to celebrate Christmas. Alternatively, we could have bearish newsflow on every single one of the above five questions.

Evidently, future market paths for DM rates, credit spreads, EMFX and the dollar – affecting most of the USD 64 trillion of securities in our benchmark – are conditional on a cluster of upcoming events, each with their own intrinsic uncertainties. So much for the traditional role of fixed income as a bit of central bank watching, economic analysis, Debt Management Office meetings and assessment of valuations! We approach some of these questions, such as the vaccine, with full humility in assessing our own information advantage (or lack of it). Others are a matter of shifting probability distributions, with some error term around them. But helping us navigate the next few packed months is our philosophy, resting on an assessment of asymmetries, potential future distributions and scenarios, positioning analysis, patience, flexibility and a value-based contrarian approach.

The net result is to enter the autumn with a high-quality tilt to our portfolios, near-term caution in credit, a preference for investment grade spread products (sovereign and corporate) under the umbrella of ECB purchases, a small bearish bias in EMFX, and some cross-market and yield curve trades that we think have attractive optionality under various future scenarios. In other words, in parts of the rates markets, we think one can position for more than one outcome in more than one of the various upcoming events and topics, while introducing some positive convexity into portfolios. Yield curve steepening positions in 2s5s in Treasuries and Bunds are one example, with a low cost in risk-off scenarios, in our view, and a greater payoff profile versus benchmarks in risk on.

Either way, we think it will pay to be nimble and flexible over the next three months – just as we were in H1 2020. To us, this is a version of Keynes’ advice to assimilate new information into the existing body of knowledge quickly, and to respond to it (which, to adapt his words slightly, means keeping an open mind, rather than changing it necessarily). Our quality bias demonstrates an overall tone of conservatism – after all, some economies are beginning to show signs of economic relapse into Q4. With partial lockdowns extending across parts of western Europe, there are even concerns of a ‘Cromwellian winter’, where discretionary consumer spending and associated jobs wither. Yet if we are right that the upcoming environment could see higher volatility, that also suggests opportunity in due course, after some of the languid weeks of late summer. We are prepared for the autumn cluster.

Logo

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

In the UK, Robeco Institutional Asset Management B.V. (“ROBECO”) only markets its funds to institutional clients and professional investors. Private investors seeking information about ROBECO should visit our corporate website www.robeco.com or contact their financial adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing these areas.

In the UK, ROBECO Funds has marketing approval for the funds listed on this website, all of which are UCITS funds. ROBECO is authorized by the AFM and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor you should therefore not proceed. By proceeding please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

I Disagree