The US and the rest of the world are now beginning to diverge from one another, throwing up opportunities to diversify across different regions, according to Henrietta Pacquement (pictured), head of the global fixed income team and the sustainability team at Allspring Global Investments.
Last week, the European Central Bank (ECB) left policy rates unchanged but indicated that it intends to start cutting rates at its next meeting in June.
In contrast, a strong CPI print in the US last week has pushed back the prospect of rate cuts in June, with traders now placing the odds at just 17% compared with 62% a week prior, according to data compiled by Reuters.
The prospect of divergence between Europe and the US has prompted a number of big fixed-income investors like Pimco in recent weeks to increase their allocation to European government bonds, betting that cooler inflation in Europe will allow the ECB to begin cutting sooner than the Federal Reserve.
This is a trend that Pacquement also sees playing out.
“The US is detaching itself from the rest of the world and seems to be having more trouble with sticky inflation. Now why’s that the case? I think one of the big differences is the fiscal packages that are still running through the system in the case of the US. So, that’s probably not helping the job of the central bank at the moment from an inflation perspective,” she said.
“We are looking to diversify across a variety of interest rate environments, just to capture some of that diversification in terms of where they are from a growth and inflation perspective. That’s how we’re playing things at the moment.”
In terms of other regions, Pacquement notes that the outlook in Asia is clouded by the prospects for China, as a result of headwinds such as those in its real estate sector.
China real estate only accounts for around 2% of the JP Morgan Asia Credit Index nowadays, and Pacquement sees opportunities elsewhere in the region, notably in Japan, which is on a different monetary policy path to the rest of the region.
While many asset managers have been banging the drum to add duration on the prospect of interest rates falling, others are saying there is no rush because rates will stay higher for longer and Pacquement is very much in the middle, being neutral on duration.
Overall, she emphasises quality on both the investment grade and high yield side, noting that security selection is key, given that spreads have rallied significantly this year.
“We are looking at some of the allocation within sectors and you have had select sectors that have rallied quite nicely since the beginning of the year. I’m thinking particularly of the banking, insurance and real estate sectors. So, what we’ve done is rotated some of the positions that we have there,” she said.
