It is important to have fundamentals on your side in fixed income, especially at a time when the global economic cycle is changing, according to Insight Investment head of fixed income specialists April LaRusse. And in this shifting economic climate, she believes fundamentals are supporting global credit markets.

In terms of the economic cycle, LaRusse notes the US and Europe are both expanding. However, she says a combination of Trump’s tariffs and Germany’s announcement on spending could be contributing towards a switch in fortunes for the US and European economies (see chart below).
 

“We are moving from a place where the US was exceptionally strong and Europe had too much risk premium attached due to energy issues and wars, to a place where those two lines are coming closer together, potentially crossing over depending on the path of US policy,” she adds.

Regarding the US economy, aside from tariff uncertainty, LaRusse notes fewer jobs being created and companies slowing or ceasing hiring. She believes there is a risk the government is leaning on an already-weak consumer. “There’s definitely a place for lower interest rates in this construct,” she adds.

When it comes to Europe, LaRusse sees headwinds and tailwinds for growth. “Other countries could follow Germany and spend. The issue is, it is hard to have heavy industry if you have expensive energy. That is going to be a challenge for European businesses,” she says.

Rates outlook

LaRusse believes the European Central Bank could cut interest rates further and faster than the Federal Reserve (see chart below), even though the tariff situation could negatively affect US growth. Despite the general downward trajectory of interest rates, she notes bond yields have moved higher, driving strong demand for fixed income from asset owners, particularly institutional investors.
 

LaRusse says investment grade credit yields look attractive relative to equity dividend yields, especially considering the volatility of equity dividends compared with the certainty of investment grade coupons.

Overall, she notes companies had a decent past quarter but the uncertain outlook around policy is creating a challenge, making long-term planning difficult. But corporate fundamentals appear positive, she adds, flagging the following:

• Leverage is good owing to higher levels of inflation and interest rates stymying companies’ ability to borrow at cheap levels in recent years.
• Profit margins appear healthy.
• Defaults have been low versus history.

LaRusse also notes an upswing in M&A activity which she posits could be driven by the large amounts of cash on company balance sheets. This could continue if interest rates move lower, she says.

Credit view

Against this backdrop, the Insight global credit team’s view is positive on long dated US and UK government bonds, and it sees opportunities in US inflation bonds versus Europe. It has a modest long credit risk position because spreads look tight, and it has a defensive sector strategy.

“When considering how to position a credit portfolio, you have to consider the growth regime you are in. We believe we are in a stabilising regime, and we think inflation is gradually normalising.

“We are not at a moment where it makes sense to run a long credit risk position relative to the benchmark. That is not to say what is going on in geopolitics and trade could not provide a window of volatility, but as it stands, we are looking for other opportunities,” concludes LaRusse.

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