Global Viewpoints: Sovereign Debt - In Sovereign Debt Investing, U.S. Dollar Direction Is Critical

by: Janus Henderson Investors

By Ryan Myerberg

In the last of a four-part series on investing in global sovereign debt markets, Portfolio Manager Ryan Myerberg discusses opportunities to find value.

Key Takeaways

  • Slowing growth means bond yields may trend lower in Canada and Australia, while the accelerating U.S. economy coupled with rising inflation could spell higher yields there, especially at the short end of the curve.

  • In Europe, Portugal and Spain present opportunities after emerging from fiscal crises, which could compress yields.

  • Investors may benefit from improving conditions in countries such as Norway, the Czech Republic, Poland and Sweden, regardless of the U.S. dollar's direction.

View Transcript

Myerberg: So, we think about value in global markets a number of different ways. We think countries like Canada and Australia where the economies are slowing, central banks are moving towards more neutral or dovish monetary policy, are places where yields should continue to move lower or provide value in global fixed income. We think the U.S. is clearly in a place where yields should move higher. We think that the front end of the yield curve is more likely to move higher given that the Fed has been very clear about their willingness to be consistent in moving the overnight rate higher over time.

We also see a lot of value in countries like Portugal and Spain in Europe, where two countries that have come out of their sovereign debt crisis, tightened their belts, become much more competitive, and it's been reflected in not only the underlying economic momentum, but also the sort of upgrade momentum from the rating agencies. Spain is on their way to single A. Portugal has now come back into the investment-grade market, and we think that momentum will continue over time. And with that should be compression towards semi-core Europe, towards core Europe, and the template we've seen before is Ireland. Ireland was in the same boat, packaged with Italy, Portugal and Spain, did all the fiscal belt tightening, is growing at the top of the table in terms of European growth and has now moved from a peripheral country basically to a semi-core country, trading not too far behind France. So we think that's the road map for Spain and certainly for Portugal over time.

We also think that it makes sense to be cautious on the U.S. dollar in an environment where global growth is stable or improving, it tends to be negative for the U.S. dollar. And there's certainly a lot domestically in the U.S. that would indicate that we should see a weaker dollar, sort of pro-cyclical fiscal expansion towards the end of a business cycle increasing these deficits. That needs to be funded somehow. It either gets funded by yields moving higher or the dollar moving lower. Our medium-term view is that that's probably the direction of travel for the U.S. dollar. But in the short term, given that global growth is a bit uncertain, that risk markets are wobbly, the dollar will stay well supported.

Look at a country like Norway for example, where growth is quite firm, where inflation is slightly underwhelming but business surveys are improving. And the Norges Bank feels quite comfortable with this idea of hiking rates by September and they've reinforced that at their most recent monetary policy meeting. So we like Norway. We like countries like the Czech Republic, where growth is quite firm, labor markets are extremely tight, inflation is picking up and the Czech National Bank is also moving towards a more hawkish stance. In fact, they've actually hiked rates, which many central banks haven't been able to do since the financial crisis. And there are countries like Poland and Sweden, which we also think are in the same boat where labor markets are tight, growth is quite strong and we think about those in the context of their ability to tighten monetary policy while the ECB gradually moves towards tighter monetary policy. So it's a relative value opportunity where we expect these currencies to appreciate faster than the euro.

Disclaimer: Foreign securities, including sovereign debt, are subject to additional risks including currency fluctuations, political and economic uncertainty, increased volatility, lower liquidity and differing financial and information reporting standards, all of which are magnified in emerging markets.

Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

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