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Each month, LBP AM deciphers market news in video. Today, Henriette Le Mintier, absolute return credit manager at LBP AM, discusses the importance of absolute return strategies in a complex and volatile economic and geopolitical context.
After two years of strong performance on bond markets, in particular in the Investment Grade and High Yield credit asset classes - which did yield +14% and +25% over 2 years, it is fair to ask whether the trend is set to continue or if, on the contrary, we are at the end of a cycle.The question is all the more fair given the complex and volatile economic and geopolitical context. Hasn’t the time come to favor absolute return strategies?
As far as interest rates are concerned, Central banks will be cutting key rates over the next 12 months, but the speed and amplitude of these cuts remain unknown. Our belief is that key rate cuts will be gradual and cautious. Given markets have already taken them into account, the directional potential on bond markets is now limited.
That is why absolute return is interesting, whether durations are positive or negative, and gives the possibility to seize opportunities on less directional assets
Turning more specifically to credit and its valuation, we have seen a sharp compression in risk premiums in recent months. We are now close to the all-time lows of 2021 for Investment Grade and High Yield. On one hand, the carry protects a large proportion of assets and deserves to be taken advantage of, even if on the other risk is poorly rewarded.
In our view, absolute-return bond management, which in recent years has been able to limit drawdowns while capturing bullish phases, remains the most appropriate form of bond management in a global environment that remains uncertain and where valuations are already high.