Active Core Bonds: A Strategic Alpha Play Amid Global Policy Shifts

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Text on screen: Q What is the outlook for core bonds?

Mittal: We are very excited about the opportunity set in core bonds today.

Text on screen: Mohit Mittal, CIO Core Strategies

Our excitement stems from three reasons. First is the starting yields,

Text on screen: TITLE - Opportunities in core bonds. Bullets - Attractive starting yields, Correlation benefits, Alpha generation

starting yields of five to 6% mean that over the next three to five years, investors can realize those returns, and in a scenario where growth was to slow down, investors can potentially realize even a double digit return.

Second is the correlation benefits in a scenario where growth was to weaken, central banks can cut rates much more aggressively and that return on core bonds can be meaningfully positive and the return on equities is meaningfully negative.

And then the third is the idea that the opportunity set for alpha creation for active value creation is quite abundant because of elevated volatility stemming from trade policies, geopolitics changing fiscal backdrop, and changing growth and inflation backdrop in different parts.

Text on screen: Q How have recent policy shifts impacted global markets and portfolio positioning?

Gupta: The single  biggest change from a policy standpoint has been in the US trade policy.

Text on screen: Sachin Gupta, Portfolio Manager

The impact for rest of the world is going to be very much negative on growth because these tariffs are gonna hit the export oriented industries in all of these economies, but it also will be negative on inflation. One, it'll depress activity in these countries, but then secondly,

Images on screen: Shipping and international ports

the goods that can't be sold in US because of additional tariffs will find their way into these economies

Now, economies across the world will try and cushion this impact in different ways. You know, in many cases we see room for monetary policy to deliver more rate cuts than what has been priced. 

Similarly, fiscal policy will also potentially become more active.

Text on screen: Unsynchronized global economic themes offer diverse opportunities for international investing

Images on screen: Canada, U.K., Australia

You know, you get to invest in different themes because economies are not exactly synchronized and that provides opportunity for us to take active risk in our portfolios.

Text on screen: Q Where are you finding global opportunities?

Mittal: First is in the interest rate space.

Text on screen: Interest rate positioning: Diverging backdrops benefit active global selection

Images on screen: PIMCO trade floor

Where we are now, what is happening is because of diverging backdrop, you are seeing different countries go through a very un or a less coordinated rate cutting cycle. So that is creating a lot of opportunities for us to take advantage of opportunities outside of the US.

Tariffs play an important role as well, whereas the tariff policy can be inflationary in the US it has a disinflationary impact outside of the US.

Gupta: Some examples are, you know, we like duration in UK, in Australia when you look at emerging markets, we like them in South Africa and Peru, in Brazil, all of these economies are, you know, valuation wise they look attractive.

And then the backdrop of the trade policy shift makes it even better.

Text on screen: Curve positioning: Steepener bias in U.S. and Europe, flattener in Japan

Images on screen: U.S., Germany, Japan

Mittal: Also is the curve position what we have done is we have taken the steepener view in the US steepener view in Europe, but a flattener view in Japan.

Mittal: When we go into credit mortgage

Text on screen: Credit positioning: Bank retrenchment favors high quality mortgage credit

Images on screen: Housing

credit in UK and in France where we are seeing banks retrace or retrench creating an opportunity for investors like ourselves to take some high quality mortgage credit risk there.

And then last but not the least is the idea around FX.

Text on screen: FX positioning: Overweight local currencies with improving fundamentals relative to the U.S. dollar

Images on screen: Stock market

This year we have shifted to an underweight dollar how do we implement that underweight dollar bias?

Images on screen: Andrew Balls, Stephen Chang, Pramol Dhawan  on the trade floor

Again, it is working closely with our global team, our emerging market team, identifying countries where the fundamentals are improving, where we can be a little bit overweight, their local currency relative to being underweight dollar.  So we have expressed it in Turkey, Brazil as an overweight relative to being underweight in the US dollar. 

Gupta: Lastly, what I would add is, you know, just for some context, I mean, global bond markets are about 150 trillion in size. This is the public bond markets. The size outside of US is about a hundred trillion. So by investing internationally, a US based investor gets to triple the opportunity set

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Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations.

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