M&G's Leaviss: It is Hard to Find Value in Bond Market

M&G's head of fixed income Jim Leaviss expects the ECB to hold rates today, and says that yields continue to be depressed across developed markets

Emma Wall 7 September, 2017 | 10:44AM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Jim Leaviss, head of fixed income for M&G.

Hello, Jim.

Jim Leaviss: Hi.

Wall: So, last time we spoke in a studio, it was May 2016 and we were concerned by the amount of negative interest rates out there. Things have improved a little bit, but not as much as some would have hoped?

Leaviss: No. I mean, after Trump was elected, you saw yields rise pretty much across the developed markets in anticipation that we are finally going to get some reflation and some fiscal spending. But really since the turn of the year, a lot of that has reversed. So, 10-year US Treasury yields got up to 2.5%. As we go through the North Korea worries and there's no sign of inflation coming back, those yields have marched all the way back down towards 2% again. And we are seeing the same around the world.

I guess the one exception maybe is Bank of Canada who hiked interest rates yesterday. But apart from that the Fed expectations of rate hikes have been marched back down again and the ECB talking about tapering but probably that's going to be a delayed story as well. We've got the meeting today.

Wall: I know it's always the worst-case scenario when we're speaking just hours before a meeting and I don't want to shoot ourselves in the foot. But it does look as if, the consensus view is that they are not going to make any big decisions about interest rates or QE yet today. When can we expect to see a bit of movement from Europe?

Leaviss: There was a leaked story on the newswires yesterday that said they were going to not say anything in today's meeting about tapering of quantitative easing but that they might do so in October. So, the expectation has shifted out a month. We probably will get some new forecasts out of the ECB today and that will say that growth over 2018 is probably going to be stronger and that's really good news and actually, European growth has been coming in stronger and stronger and surprising to the upside. But at the same time, given how strong the euro has been over the past months, they may well shade down their inflation expectations going forward. So, they have an excuse not to do anything if they wanted to. But I think at the end of the day, they would like to send a message that QE isn't going to go on forever, but that maybe October's message rather than today's.

Wall: So, yields staying low in Eurozone, yields coming down in the US from the highs towards the beginning of the year. Where are you seeing the best opportunities for income? Because it doesn't seem like there are that many around.

Leaviss: No, and I think that's right actually. I can't sit here hand on heart and say that there are fantastic opportunities now in either government bonds or in credit. We are seeing ever since the ECB started buying corporate bonds, the yields and the spreads on corporate bonds and high-yield corporate bonds have come all the way down. So, you are only getting paid around 3.5% for over and above government bonds even in high-yield junk bonds. So, I think we are down at fair value levels at best in areas of the credit market. That doesn't mean that can't persist for a while and I think that this relentless buying we've seen, both from the ECB but also from real money accounts in America in particular are buying investment-grade credit, perhaps means that you carry on owning investment-grade credit for a little while longer. But in terms of the gimmie valuations that we may have seen a year or two ago, they are no longer there.

So, if you're looking for where are the opportunities, well, they are few and far between. But if you look at some areas of emerging markets, there are still real yields, are inflation-adjusted yields of 3%, 4%, 5%. So, some signs there. But let's not forget that they are quite driven by geopolitical risks and geopolitics has sort of moved right up to the top of our list of things to worry about again.

Wall: Jim, thank you very much.

Leaviss: Thanks.

Wall: This is Emma Wall for Morningstar. Thank you for watching.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
M&G Global Macro Bond GBP R Acc133.84 GBP-0.38Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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