Expect more of the same for global fixed income

Global fixed income markets in the second half of the year will be similar to Q2, according to Brandywine Global Investment Management.

In its global mid-year outlook, it said there would be a directionless trading bias, which lacked in conviction and kept most developed market bond yields range bound.

Jack McIntyre, Brandywine director of global macro research, said bond markets would continue to struggle with the idea that the economic data reflected more noise than signal.

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“I do not expect the market to break out until we move past supply bottlenecks and the supply/demand relationship falls back into alignment,” McIntyre said.

“If we think of economic activity in terms of organic drivers and inorganic drivers, we are knee deep in the latter.”

However, McIntyre said it was the former that would turn the recovery into an expansion.

“We are woefully underinvested in inventories in many parts of the economy, which is at the root of the supply/demand imbalance,” McIntyre said.

“This misalignment could start to improve later this year as the economic recovery continues apace, we hit peak demand, the supply curve shifts out, and production continues to ramp up.

“As inventories get restocked and an inventory cushion is built, production may increase at a more sustainable pace deep into 2022-23. This outlook is bearish for bonds.”

McIntyre said the Fed was in the same boat as bond investors when it came to interpreting the data and if there was clarity, central bankers would go slow on transitioning to tapering, despite the “hawkish” tilt of the June Federal Open Market Committee (FOMC) meeting.

“Global vaccinations are moving in the right direction and gaining momentum, which will reduce the uncertainty around COVID-19. In turn, overall market uncertainty also will continue to subside,” McIntyre said.

“We likely have hit peak fiscal stimulus as well. In the debate of where value in global bonds may exist, developed market bonds continue to fall short.

“On a real yield basis, not enough inflation expectations are being priced into nominal yields. Where then can bond investors find attractive total return opportunities?

“We believe the answer is found in those bond markets that trade at attractive yield premiums—emerging markets.

“We still find compelling value in the local currency sovereign bonds of Mexico, Indonesia, South Africa, Brazil, and Colombia.”

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