Emerging market bonds preferred over Treasury

A global asset manager is eyeing riskier assets like high-yield and emerging market bonds, while they are warning investors against Treasury bonds, amid rising interest rates and inflation.

Eaton Vance's co-director, Eric Stein said: "If interest rates rise gradually because the economy is growing faster, these sectors shouldn't be hurt that much. However, a violent jump in rates could lead to some dislocation in credit markets".

High-yield and emerging markets fell after the US election, and there could be opportunity, whether from an absolute standpoint or relative to US Treasurys, he said.

Markets anticipated better growth rates and higher interest rates structures, while there was also an intense sell-off of nominal treasury bonds, he said.

That was driven by rising expectations that both rates and inflation would rise post the election. He also said that Treasury bonds would also continue to decline.

"First, [they will continue to decline from] the rising inflation expectations, second, we're going to have more fiscal easing, whether it comes from taxes or spending, or likely some combination of both. That means more issuance of Treasury bonds. Finally, if we get more economic growth, which I think is likely, then that should lower demand for Treasurys".

"The post crisis years have been defined by declining real rates and seemingly permanent falling inflation expectations. However, both real rates and inflation expectations had been picking up even before the election. Now, after President-elect Donald Trump's victory, we may be in for a very different bond market.

"So, investors should look for strategies that were opportunistic with long and short positions, he said.

"Elsewhere, I like TIPS [treasury inflation protected securities] for the reflation trade, but only if investors can hedge the duration risk and focus on inflation breakeven rates. Also attractive now are floating-rate loans, collateralised loan obligations (CLOs) and certain types of mortgage-backed securities."