Fixed-Income Opportunity: European High Yield Bonds

PERSPECTIVES: Jupiter's strategic bond fund manager pinpoints areas of opportunity for fixed-income investors in 2014

Jupiter Asset Management 2 January, 2014 | 2:35PM
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This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Ariel Bezalel, manager of the Jupiter Strategic Bond Fund, comments on the outlook for 2014. 

In 2014, global bond markets will pay close attention to the actions of the US Federal Reserve (Fed), which has started to wean the US (and global) economy off its $85 billion per month quantitative easing programme. The news that the Fed would initially taper its programme by $10 billion per month was at the dovish end of expectations and was greeted well by bond and equity markets. The lower-for-longer tone to the Fed’s forward rate projections was also positive. It underscored that the Fed believes the economic recovery still has some way to go and affirmed the central bank’s desire not to relinquish control of the yield curve and cause undue weakness in the economy and markets. 

We remain optimistic about the outlook for credit markets in 2014. Our bullish case is that economic data broadly meets expectations and the market factors in an orderly process. Under this scenario, we believe there is potential for high yield bonds to produce decent returns. However, we remain mindful that the Fed faces a formidable task. There is a risk that economic data will come in a lot stronger than expected. This may lead to a market panic over the pace of rate rises and potentially bring forward expectations for a rate increase to later in the year, igniting a 1994-style market reversal. This seems unlikely for now, as low US inflation is currently giving the central bank cause for concern and a justification for maintaining a gradual approach to tapering. In his speech, Ben Bernanke even highlighted that the Fed may consider further action if inflation did not move up towards its 2% target. However, should growth start to accelerate, US inflation data will receive close scrutiny and is likely to be a particularly important indicator for shaping bond market sentiment in the coming year.  

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Jupiter Strategic Bond L Inc65.38 GBP0.11Rating

About Author

Jupiter Asset Management  Jupiter Fund Management is a UK fund management group, managing equity and bond investments for private and institutional investors.