13 August 2020
At GAM Investments’ Weekly Fixed Income Meeting held on 11 August, several of our investment specialists discussed their views on current market conditions.
Rahul Mathur – Global Rates
The policy backdrop may be on the verge of changing. The Federal Reserve (Fed) is expected to announce the results of its year long policy review soon. It seems likely that it will commit to a strategy of debasement through inflation overshoot, by locking-in policy rates until the inflationary overshoot is achieved. The Fed appears ready to take a bet that demand is so weak structurally that the explosion of monetary aggregates will not generate upside risks to medium term inflation outlook, inflation expectations or a wage-price spiral. On balance, we continue to see positive inflation surprises. For example, in Norway, core inflation surprised to the upside for the fourth consecutive time in July. Inflation is generally weak, but not as weak as was expected a few months ago.
Chien-Chung Chen – Mortgage-Backed Securities
There has been a good technical picture and some fairly strong demand for non-agency MBS, which allows spreads to grind in tighter. There is still relative value compared to other sectors in US fixed income. In US housing, the fundamental picture is still in good condition. Going into Covid, the US consumer was in a better state compared to past crises. We have seen some elevation in delinquencies since March, but this is being supported by continued fiscal stimulus and low mortgage rates. Mortgage rates are still slightly higher than what one would expect given where Treasury rates are, but is on a downward trend. This provides some tailwind for US housing, as mortgage rates have room to drop further, making things more affordable which helps for mortgage credit. We remain bullish on non-agency MBS.
Paul McNamara – Emerging Market Debt
EM debt has performed adequately of late, though benefitting much less from US dollar weakness than we would have expected. Short positions in the US dollar have become sizeable across the market, and there is some concern among EM investors that the greenback could bounce as America begins to get on top of Covid-19 infection rates. Overall, EM fundamentals look reasonable to strong, in our view. We are somewhat cautious on countries such as Russia, India and South Africa, where it appears that the virus is not yet under control, and particularly concerned about Turkey given its dollar liquidity position.
Source: GAM unless otherwise stated. The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Reference to a security is not a recommendation to buy or sell that security. The companies listed were selected from the universe of companies covered by the portfolio managers to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers. August 2020.