Fixed Income
Competing forces in the high yield bond market
Rhys Davies, fund manager, explores why his fund's exposure to B-rated and lower bonds is at historic lows, citing good yields in higher rated bonds and the risks with lower credit bonds.
By harnessing manager skill, we aim to generate above market returns from the attractive yield and income opportunities offered by emerging market local debt. In the same way, we aim to minimise the potential downside that goes hand in hand with the relatively higher risks of this asset class.
Our macroeconomic base case evolves gradually. However, the market pricing of this base case changes more rapidly, which provides opportunities to take advantage of changing risk premia. We believe the key to better risk-adjusted returns is allocating risk based on a macroeconomic outlook.
The strategy aims to outperform the J.P. Morgan GBI-EM Global Diversified Index by 200 bps (gross of fees) annually over rolling three-year periods.
We manage our portfolios using a top-down global macro analysis to determine the overall portfolio risk budget.
We combine this with bottom-up country analysis to identify favourable, country-specific opportunities:
Risk is continually monitored.
Watch the video to find out more about the team's investment process and philosophy
At Invesco Fixed Income, we believe a portfolio’s tracking error is an inadequate measure of volatility when it comes to local currency emerging market debt because it gives equal treatment to the positive and negative differences between a portfolio and its benchmark.
Thus, to reduce volatility throughout the emerging market cycle, we employ asymmetric risk budgeting by generally taking tracking error below that of the benchmark’s long-term standard deviation. For example, if tracking error is 6% and the benchmark has a standard deviation of 12%, we typically stay in the 6-12% range for standard deviation not in the 12–18% range.
Locally denominated debt securities in emerging markets expose investors to a variety of risks driven by foreign exchange, credit quality, interest rates, macroeconomic conditions, and regional politics. This unique combination of risks, in our view, warrants special emphasis on limiting potential downside.
We believe this is best achieved through manager skill, which at the same time can wring value from market exposure to attractive yields and income.
The Global Debt Team offers international expertise within a broad, global lens. The team manages USD 10bn across its platform, including USD 6bn in Developed Markets and USD 4bn in Emerging Markets.
Competing forces in the high yield bond market
Rhys Davies, fund manager, explores why his fund's exposure to B-rated and lower bonds is at historic lows, citing good yields in higher rated bonds and the risks with lower credit bonds.
Global Fixed Income Strategy Monthly Report
In our regularly updated macroeconomic analysis we offer an outlook for interest rates and currencies – and look at which fixed income assets are favoured across a range of market environments.
Monthly fixed income update
June saw a resurgence in political risks with a snap election called in France, the upcoming general election for the UK, and the first televised debate between Trump and Biden ahead of the presidential election in the US. Read our latest thoughts on how fixed income markets performed during the month and what we think you should be looking out for in the near term.
Emerging market local debt | Monthly macro insights
Catch up on monthly fixed income insights from our emerging market local debt team.
Emerging market investment grade debt for insurance companies
At Invesco, we have extensive experience investing in EM debt and working with institutional clients to provide tailored solutions that can meet their exact requirements.
Bitesized bonds: catch up on fixed income in under three minutes
Each month brings a new, easily digestible instalment. Catch up on all things fixed income in under three minutes.
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Data as at December 2020, unless otherwise stated. By accepting this document, you consent to communicate with us in English, unless you inform us otherwise. Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice. This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.