FIIG - The Fixed Income Experts

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2013 fixed income preview - The year to de-risk and diversify

by Justin McCarthy | Feb 07, 2013

Executive summary

  • Credit spreads (and risk assets in general) have rallied significantly over the past six months
  • “Technical” conditions are strong with many new buyers entering the market recently, however, credit fundamentals have not significantly changed with persistent European sovereign debt risks, amongst others  
  • Signs of pre-GFC-like insatiable appetite for yield paired with an apparent disregard of differences in underlying fundamentals are emerging
  • Given the significant increase in bond prices and strong market conditions, there is an opportunity to de-risk and rebalance portfolios and without a material change in expected yield to maturity of the overall portfolio
  • Reduce overweight financial exposures (particularly callable subordinated debt and Tier 1 hybrid securities) and add low risk senior debt, including Australian infrastructure and inflation linked bonds
  • Sophisticated investors should also consider adding residential mortgage backed securities (RMBS) and non-A$ issues from strong Australian companies to their portfolios
  • 2013 is the year to de-risk and diversify – tight credit spreads mean there is limited upside but significant downside if market sentiment turns negative (and if credit spreads were to deteriorate materially, it would present an opportunity to buy back in with superior risk-reward dynamics)
You can access our new online de-risk and diversify toolkit here. Developed by FIIG's Research Team, the kit includes a special report, portfolio solutions and a link to register for our upcoming webinar. The page will be updated throughout February.