David Leduc, manager of the BNY Mellon Global Strategic Bond Fund, has a broadly positive outlook for corporate bonds despite the recent sovereign credit risk dominated headlines.
While these headlines remain centred on bonds issued by Greece, there are also concerns over the ability of Spain, Portugal and Ireland to meet their respective obligations.
However, Leduc says that while further macroeconomic shocks would evidently pose a risk to investors, the risks are not sufficiently high to prompt the firm to alter its overall view or investment strategy.
“After all, short-term volatility can create attractive buying opportunities and we, as always, remain alert to these,” says Leduc.
“We continue to focus on bonds issued by well managed companies with strong balance sheets that are not excessively leveraged. Even in an environment of only modest growth, we expect these companies to continue to perform well.”
At the sector level, within financials BNY Mellon continues to have a preference for bonds issued by resilient global banking businesses.
“We remain extremely comfortable with the credits that we own, from issuers such as HSBC and Nykredit, and we expect them to continue to perform well in the medium to longer term. That said, while we believe that select subordinated bank bonds could perform well in the future, risks nevertheless remain, especially in an environment of increasing concern over sovereign risk,” says Leduc.
Within its bank bond holdings, the firm’s focus remains on the senior debt securities of global and larger European banks, but it continues to eye those more leveraged banks – especially in Europe – with a degree of caution given the uncertainties surrounding those types of institutions.
Despite the prospect of rising interest rates in the major economies in 2010, Leduc is not unduly concerned, although portfolio positioning has been adjusted in response to the current economic backdrop.
“Our decision to reduce the duration overweight in the US and the UK is an acknowledgement that the sheer scale of the policy stimulus that has been witnessed in these economies may put upward pressure on interest rates in the medium term,” he says. “Meanwhile, doubts persist over the longer-term health of the US dollar with further weakness expected; however, in the short to medium term it has become increasingly unclear as to the true nature of the relationship between the US dollar and its G-3 counterparts.”
While it is generally accepted that the highest risk of a sharp negative surprise to bond market investors is from the credit sectors, Leduc has cause for optimism.
“We remain hopeful that both the fundamental economic environment, and the issuer-specific environment will remain quite positive in 2010; companies are spending less overall on capital expenditure, and this in turn is leading to the increasing prevalence of overall negative financing needs. In short, we are fundamentally comfortable about the prospects for the corporate bond sector and expect demand for the asset class to remain high.”