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Amundi wary of bond liquidity

Even though he is ‘positive but not bullish’ on the corporate credit market, Grégoire Pesquès, head of global credit at Amundi, said he is focused on bond liquidity.
Grégoire Pesquès, Amundi

Pesquès, who leads a six-person investment team from London, said he believes the biggest risk to bonds in the next eight to 10 months is volatile global politics, particularly the rise of populism in the US and Europe.

“[Therefore] it is important to either have a good level of cash or to be in quite liquid securities that will enable you to quickly turn your portfolio,” he explained.

“What has changed following the financial crisis is that now we are managing as much credit risk as we are liquidity risk. What it means is that you have to make liquidity the performance driver, so you can capitalise on it. Many people under-estimate this and you can be in a position where you can be a prisoner because you can’t implement many ideas.”

Liquidity strategies

Pesquès explained that different types of strategies are available “to make sure that liquidity is a friend and not an enemy”.

One way is using cash holdings in the portfolio to buy bonds when there is an increase in the liquidity premium. “It can work over the short-term, when you expect a jump in volatility,” he said. “But it can be costly.”

Another way is to overweight new bond issuance that is linked to the benchmark. “It is not a question of the [bond] quality, but on whether this is new bond issuance, because as time goes by bond liquidity tends to dry-up.”

Another approach is to allocate to all types of fixed income securities. For example, some portfolios have the ability to use credit derivatives as a way to have some beta in the portfolio.

“Credit derivatives are very liquid, so you can [swap in or out] at some point while keeping the same risk or similar risk in your portfolio. Sometimes you can be better off with short-term liquid bonds instead of implementing long credit strategies with bonds. It is all about how to play the portfolio to capitalise on the liquidity premium,” said Pesquès.

Bond sector overweights

Amundi is positive but not bullish on the global corporate credit market. The optimism is limited due to the high correlation with interest rate direction, Pesquès said.

He added that he believes the global default rate does not present an out-sized risk to the bond market in the next 12 months.

The general trend has been an increase in company earnings and there are no signs of significant financial burden, he said.

Pesquès also manages the firm’s Bond Global Corporate Fund, which is mostly exposed to investment-grade bonds but can go up to 15% portfolio exposure to high yield. He said the fund was launched before the collapse of Lehman Brothers in 2008 and has not had a default.

The investment team maintains overweights on the financial, energy and telecom sectors.

In financials, they are now “short term on the curve. Before we were very long financials, but we have been reducing the allocations of the long-term maturities over the last six months. If you still prefer to be on the riskiest part, still in bonds, it’s better to not to have a too long a duration. That I think is the perfect way to play the last leg of the big rally in the banking sector.”

Pesquès has a strong tilt toward subordinated debt, particularly short-term from one to five years.

Within the energy sector, particularly in the US, Amundi has been moving from exploration and production companies to those focused on pipeline revenues, which Pesquès said he thinks will benefit more from oil price momentum.

Telecoms stay overweight, meanwhile, “due to three or four specific names”, mostly in the US and Europe. “It is a sector that is moving a lot due to changes in technology and habits, and it will benefit from some M&A. This could be a very interesting point to enter new names,” he added.

Short positions are on US high yield and the team is underweight Europe corporates. “The main reason is that the ECB bought a big part of the market and we think that is going to stop. There are very flat valuations. Valuations are getting slightly more attractive, but we are not there yet.”

The Bond Global Corporate Fund vs the sector

Source: FE. In US dollars over three years to 25 September. The fund’s benchmark is the Merrill Lynch Global Large Cap Corporate Index USD hedged, which is unavailable in FE. The fund is for sale to accredited investors in Singapore.

Part of the Mark Allen Group.