Time to think globally about fixed income

Recent softness in the U.S. dollar suggests the start of a new era for global bonds. Yields are attractive again and investors have more options for using fixed income to position for different outlooks, including possible hard or soft landings for the U.S. and global economies.

Furthermore, global fixed income investing offers multiple sources of alpha. As active managers, we dynamically apply all drivers, including country rotation, duration decisions, credit selection and currency exposure. This flexibility allows us to respond and adjust more effectively as the investment climate turns more volatile and bond markets become increasingly complex, without sacrificing quality or incurring additional risk.

We believe global bonds, both developed and emerging, now offer compelling opportunities for investors seeking value, diversification, and return potential – while still offering safety.

3 ways investors need to think differently about fixed income

1. Think globally with a macro perspective

Bond investors often have a strong home-country bias, but investing in one country and currency may be risky. Since the majority of developed market sovereign bonds are found outside the U.S., investing across global fixed income markets provides an expanded opportunity set, including exposure to multiple business cycles.

Top-down macro analysis provides the necessary broad perspective for understanding the interdependencies between countries, bond markets, and currencies. In our view, it is also an efficient way to focus research on identifying the best relative opportunities.

2. Think beyond benchmarks

We have always held the belief that global bond indices are flawed due to their construction methodology, which assigns weightings based on the amount of eligible issuance. The largest issuers of debt are allotted the largest benchmark weights, skewing indices toward the biggest issuers. We contend this approach to index construction creates a misalignment of interests between issuers and investors. As market conditions become more challenging amid rising interest rates, our view is that a best opportunity for outperformance lies in an approach that is either benchmark-agnostic or benchmark-aware.

We believe greater flexibility allows investors to actively seek out areas of the global bond markets offering the best combination of real yield, valuation, and quality while avoiding or minimizing exposure to unattractive countries or sectors, regardless of benchmark weightings.

3. Think differently about risk — tracking error may not be the best risk metric for fixed income

For bonds, minimizing tracking error has been the traditional approach to controlling risk. However, underperformance – not tracking error – may be bond investors’ greatest enemy. For example, what is the advantage of closely tracking a negatively performing index? In this case, higher tracking error could be beneficial to an actively managed portfolio.

We believe equating volatility with risk limits the performance potential of a fixed income strategy and may even be a possible hidden source of risk. Believing that a pragmatic view of risk is necessary for long-term outperformance, we are willing to incur some volatility to find what we consider the best real yield opportunities.

Instead of tracking error, we feel our value-driven approach focused on uncovering the most attractive combinations of value, quality, and strong or improving fundamentals may help investors outperform the market during periods of negative performance for the indices, resulting in strong down-market capture.

Macro Insights

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