Resilient returns: unlocking fixed income’s potential in volatile times for Asian institutional investors

Key drivers of global FI markets today

A myriad of factors influence the global FI markets, with three primary drivers standing out: fundamentals, relative valuations, and technicals.

• Fundamentals encompass the economic indicators that shape the macroeconomic environment, such as growth and inflation. Understanding the interplay between these factors is essential for making informed investment decisions. For instance, the current environment is characterised by slower global growth and gradually declining inflation, although this varies across different regions.
• Relative valuations involve assessing whether investors are being adequately compensated for the risks they are taking. This requires a keen eye on the relative value of different fixed income securities and sectors.
• Technicals refer to the supply and demand dynamics within the market, including the positioning of market participants and the presence of crowded trades. These technical factors can significantly impact the liquidity and pricing of fixed income securities.

Opportunities in global FI

In the current environment, higher yields and increased dispersion in global rates markets offer attractive opportunities for FI investors.

The ability to manoeuvre across different countries and yield curves allows for the identification of mispriced value. For example, we find opportunities in the curves of various markets, including some emerging market countries, the US and Canada where the potential for returns is higher.

Navigating volatility and market positioning

Volatility in the FI markets presents both challenges and opportunities. As an active manager, we leverage volatility to uncover mispriced risk premia and generate alpha.

The key to navigating volatility lies in a well-diversified portfolio and strategic positioning.

Portfolio positioning

We adopt a diversified approach to our portfolio positioning. In terms of duration, we are slightly overweight, with a focus on regions and countries like Latin America, the US and Canada. This diversified duration exposure helps mitigate risks and capture potential returns from different macroeconomic environments.

In the credit space, we maintain a low level of high yield exposure, preferring investment-grade securities, particularly in Europe. This conservative approach to credit exposure ensures a balance between risk and return.

Selective exposure and risk management

Selective exposure and robust risk management are integral to our strategy. Our exposure to high yield is kept at a conservative level, with the flexibility to increase it during periods of market dislocation.

This selective approach allows for the capture of upside potential while managing downside risks. Additionally, the use of hedges, such as credit derivatives and inflation swaps, provides protection against market volatility and helps maintain the core of our cash bonds.

Balancing public and private credit

The balance between public and private credit is a critical consideration for FI investors. Public fixed income markets offer liquidity and transparency, while private credit can provide higher yields but comes with liquidity constraints and less transparency.

Public FI markets

Public FI markets are characterised by their liquidity and the ability to trade securities readily. This liquidity is crucial during periods of market stress when investors may need to adjust their portfolios quickly.

The transparency of public markets also allows for better visibility into the underlying assets and their performance.

Private credit

Private credit, on the other hand, offers the potential for higher returns due to the illiquidity premium. However, this comes with the risk of being unable to access funds when needed.

The lack of transparency in private credit markets can also pose challenges in assessing the quality and performance of the underlying loans.

We recognise the role of private credit in a diversified portfolio but emphasise the importance of not over-allocating to illiquid assets.

Specific risks for Asian institutional investors

While the strategies and opportunities in global FI markets are promising, Asian institutional investors should be aware of specific risks that may impact their investments:

1. Currency: Fluctuations in exchange rates can significantly affect the returns on FI investments, especially for those denominated in foreign currencies. Asian investors need to consider hedging strategies to mitigate currency risk.
2. Interest rate: Changes in interest rates can impact the value of FI securities. Given the diverse interest rate environments across Asia, investors should be mindful of the duration and interest rate sensitivity of their portfolios.
3. Credit: The creditworthiness of issuers can vary widely across different countries and sectors. Asian investors should conduct thorough credit analysis and diversify their holdings to manage credit risk effectively.
4. Liquidity: The liquidity of FI markets can vary, with some markets being less liquid than others. This can pose challenges in times of market stress when investors may need to sell securities quickly.
5. Regulatory: Regulatory changes in different countries can impact the FI markets. Asian investors should stay informed about regulatory developments and their potential implications for their investments.
6. Geopolitical: Political instability and geopolitical tensions in the region can affect market sentiment and the performance of FI securities. Investors should monitor geopolitical developments and adjust their portfolios accordingly.

Unlocking the potential in FI

The global FI markets are shaped by a complex interplay of fundamentals, relative valuations and technical factors. Navigating volatility requires a diversified and strategically positioned portfolio, with selective exposure and robust risk management. Balancing public and private credit is essential for optimising returns while managing liquidity and transparency risks.

For Asian institutional investors, the focus on diversified duration exposure, along with a conservative approach to credit exposure, offers a tailored strategy to navigate the unique challenges and opportunities in the region.

However, it is crucial to be aware of specific risks such as currency fluctuations, interest rate changes, creditworthiness, liquidity, regulatory changes and geopolitical tensions to make informed investment decisions.

Expertise backed by a global platform

Our expertise in managing FI investments is backed by a robust global platform. With a team of 130 FI professionals and a broader investment team of 250 investors, we leverage our global presence to deliver comprehensive investment solutions. The collaboration across offices in Boston, Toronto, London and Singapore ensures a broad base of capabilities and insights into various FI markets.

The firm's long history of managing FI strategies, including the launch of its first US corporate bond fund in the early 1970s and the global aggregate opportunistic strategy in 1989, underscores its deep expertise and commitment to delivering consistent risk-adjusted returns. Our approach combines asset allocation and security selection to generate alpha, with a strong emphasis on risk management and diversification.

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_{This material is for general information purposes only, with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. This material does not constitute any promotion of or advice on MFS investment products or services. The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice. Past performance or any prediction, projection or forecast is not indicative of future performance. Diversification does not guarantee a profit or protect against a loss. The information contained herein may not be copied, reproduced or redistributed without the express consent of MFS. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, MFS does not give any warranty or representation, expressed or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. MFS accepts no liability for any loss, indirect or consequential damages, arising from the use of or reliance on this material.}

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