Bond markets to stay volatile says expert

MANAMA: Bond investors should remain prepared for episodes of higher price volatility and lower trading liquidity as the Covid-19 crisis continues, suggests a leading expert.

Dominique Maire, head of fixed income investment management at Julius Baer and a development economist by training, told the GDN exclusively that market shocks have historically offered opportunities to buy quality credit at attractive valuations.

“It’s also the right time for active portfolio management.”

Middle Eastern bond markets are included in the global emerging bond market indices and were thus exposed to the bout of capital flight experienced by this broader asset class during the Covid-19 shock.

They nonetheless recovered faster than some other regions, he said.

By mid-June, the region’s corporate bonds denominated in US dollars had already returned to breakeven year-to-date levels and as of late August they have outperformed global emerging market corporate indices by more than 2 per cent, making the Middle East the best performing region within EM corporate markets.

According to Mr Maire, one of the reasons was the relative superior credit quality of regional issues as well as the higher share of quasi-sovereign issuers which provides confidence to investors.

The region’s sovereigns were among the world’s first to make jumbo bond issues after the crisis, which together issued $28 billion in new bonds in early April.

Their 10-year tranches are all trading more than 10pc above their issue prices, illustrating renewed investor demand for the region’s bond markets.

Talking about regional appetite and trends, he said Middle Eastern bond investors expect attractive cash flow generation and strong risk management, opting for diversified access to global corporate bonds as well as quality high yield and emerging market bonds.

“During the Covid-19 market shock we saw that our clients from the Middle East did not sell out of their discretionary bond investments. They have also been among the first to respond to new investment opportunities in the aftermath of the crisis,” added Mr Maire.

This indicates that Middle Eastern investors tend to take a long-term view, which has supported investment performance during this market shock across the fixed income space.

Overall, he is optimistic about the market outlook.

“The speed and amount of fiscal stimulus and quantitative easing together with the increase in the balance sheet and the resulting liquidity boost has been remarkable. Central banks have suppressed bond market volatility and provided accommodative guidance,” said the expert.

Explaining why this is a tail wind for credit markets, Mr Maire said, “excess money supply boosts savings and thus the demand for yielding assets”.

At current interest rates, most high quality government bonds may yield low or negative returns.

Corporate bonds represent attractive alternatives, thanks to their predictable cash flows.

Even so, default rates will rise in the countries and sectors most exposed to the Covid-19 shock.

“Governments and central banks will not be able to save everybody,” said Mr Maire.





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