The clamour for yield among bond investors is on par with the highest levels ever seen, according to Henderson Global Investors’ head of fixed income.
In a market update, Philip Apel said one of the main beneficiaries of this increased demand has been the credit sector, which he has backed to outperform.
Fed efforts to constrain interest rates, Apel said, has forced bond investors to look for higher yield parts of the market.
‘We still feel you will get good returns from credit in 2014. The problem is credit has had a terrific start to the beginning of the year and that is really driven by three factors.’
‘The first is the fact the market is pricing in lower for longer from the Fed, so the demand for yield is as intense as it has ever been. Also, the flows for bond products have actually come back having been weak through the back end of 2013.
‘That supply of new issuances has been relatively compared to what you would normally see at this time of year.’
While Apel remains largely bullish on the credit sector, he does not expect it to be plain sailing. ‘We are very positive for 2014 but we are cognisant that, in the very near term, we may have a slight set-back in credit.’
Elsewhere in positioning, Apel, who assumed the role of head of fixed income in November 2013, said they are still positive on the outlook for the US dollar, while negative on the euro and the Japanese yen.
One recent change, however, is a softening in the firm’s view on the Australian dollar. Echoing comments made by Asian income specialist Jason Pidcock of Newton, Apel said the currency was now in a better position.
‘We’ve reduced our underweight to the Australian dollar, which was weakened off the back of concerns in the emerging markets and China. So we have reduced that position after it performed very well.’
Apel pointed to the extreme weather in the US having been part of the reason for a weakened US dollar, but he expects this to recover more strongly and he is positioning for the currency to appreciate.