Global bond market is a challenging place but senior portfolio manager believes there are other options with return potential
by Marc-André Gaudreau
Vice President & Senior Portfolio Manager
1832 Asset Management L.P.
The current state of the global bond market is perhaps one of the most challenging environments for fixed-income investors in recent memory. As of mid-August, almost $17 trillion in bonds are trading at negative yields. Yield curves in places such as Switzerland, Germany and the Netherlands are below zero all the way out to 30 years. There has never been more debt trading at record low yields.
Meanwhile central banks around the world have begun cutting rates to soften the impact of an anticipated global slowdown caused by the ongoing trade war between the U.S. and China. The U.S. Federal Reserve cut interest rates in late July–the first time in over a decade–while the European Central Bank is poised to restart its quantitative easing program.
Such low yields make investing for income especially difficult, leaving investors without a historical roadmap to guide their bond investments. Many in need of a steady income stream have been forced to take on additional risk–a precarious condition as we approach the end of the business cycle.
Income investors will have to think of an alternative option. It’s time to consider alternative investments that have the potential to generate absolute returns over a full-market cycle.
Alternative Tools for Absolute Returns
Bond managers can use alternative strategies, such as leverage, credit arbitrage and the ability to implement both long and short strategies to generate positive returns in a variety of market environments. Let’s take a closer look at each strategy.
Leveraged investment-grade corporate credit
Modest amounts of leverage can be used to potentially magnify the returns of high-quality, liquid, short-term investment-grade corporate bonds. This strategy requires shorting equivalent maturity government bonds in order to minimize sensitivity to interest rates.
Long-short credit
The ability to short securities identified through credit research that are trading at expensive valuations with worsening credit profiles is essential to potentially benefit from deteriorating credit environments. A long-short strategy provides a manager with additional flexibility to mitigate downside risk, and possibly make money for investors, even during an economic downturn.
Credit Arbitrage
Occasionally (mainly during periods of heightened volatility), valuation dislocations can arise in different markets. For example, bonds trading on both the Canadian and U.S. markets can diverge in price and create arbitrage opportunities. The manager can generate market-neutral profit as the dislocation returns to normal.
These three tools just mentioned above provide flexibility for an active manager to be able to successfully execute the absolute-return strategy, which gives investors the potential for enhanced portfolio diversification and mitigated downside risk.
A very timely opportunity
For advisors concerned about generating income in a low-yield environment, Dynamic Credit Absolute Return II Fund combines the flexibility to access leverage with actively managed long and short positions across its three principal investment strategies to provide income and the potential for capital appreciation over a full-market cycle, while maintaining an investment-grade credit rating.
About Marc-André Gaudreau
Marc-André Gaudreau has over 20 years of industry experience. He joined Dynamic in 2012 as head of the Specialized Credit Team, which is responsible for managing over $5.5 billion in credit-related asset classes, including investment-grade corporate bonds, preferred shares, high-yield bonds and loans, along with floating-rate and credit absolute-return strategies.
Learn more about Marc-André Gaudreau and the recently launched Dynamic Credit Absolute Return II Fund.
