AXA IM : Search for yield by investors should provide solid support for investment grade and high yield credit
With the global economy expanding, inflation low and liquidity abundant, the search for yield by investors should provide solid support for investment grade and high yield credit.
Given the current economic environment Chris Iggo, CIO Fixed Income at AXA IM, believes that:
"While sentiment will swing around, a sober assessment of the business cycle should conclude that lower energy prices are, on balance, good for growth and that in the US the Federal Reserve (Fed) is likely to begin raising interest rates this year.
"Fed policy will raise real short term interest rates to at least zero in the coming quarters and that should mean up to 150bps in Fed Funds increases through 2016. If that is the case, it is hard to see medium and longer term market yields remaining at current levels.
"In Europe, the central bank looks intent on embarking upon a programme of increased asset purchases, probably involving sovereign bonds. This is expected and the market may have already priced it in, so there could be some negative reaction from core bond markets on announcement. However, with the European Central Bank (ECB) adding to the global stock of liquidity provided by central banks, bond yields overall should be prevented from rising too much in 2015, especially as low levels of inflation are likely to be sustained.
Looking forward James Gledhill, Head of European High Yield at AXA IM, highlights why he is quite positive on European high yield in 2015:
"The sell-off in the second half of 2014 makes valuations look more appealing and has pushed the yield back above 4.4% which we believe is attractive. The European economic environment has not made a complete turnaround, but we expect GDP growth to be mildly positive, default rates to remain low and credit markets to be supported by accommodative policy by the ECB. Potential tail risks could be related to Greece and emerging markets, while the oil price decline is a positive for a broad range of issuers in the European high yield (HY) market.
"The European market has behaved almost like three separate markets. The BB rated, highest quality section, (principally ‘fallen angels') has remained in demand and linked to the investment grade market where spreads have been very stable. Similarly, the high yield financials section has traded quite well. These two areas have led to European HY indexes holding up well as they represent a large weighting. Significant spread widening has, however, occurred in the more lowly rated balance of the market. Some of these moves are the result of actual changes to the outlook for some bonds, for example in the retail sector, but in other cases the spread widening is unrelated to fundamentals and represents an opportunity for investors. This is also the case for yield to call short duration paper, a section of the market that has seen outflows in 2014 but is now seeing better demand and continued refinancing."
By Chris Iggo, CIO Fixed Income at AXA IM
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AXA Investment Managers is a multi-expert asset management company within the AXA Group, a global leader in financial protection and wealth management. AXA IM is one of the largest European-based asset managers with approximately €607 billion in assets under management as of the end of September 2014. AXA IM employs 2,300+ people around the world and operates out of 26 offices in 21 countries.