Hunt for yield

Monetary policy looks set to remain accommodative, keeping rates lower for longer. Federal Reserve officials continue to stress that rates will remain near zero for the foreseeable future, indicating a willingness to allow inflation to overshoot the 2% target for some time before rates needed to rise.

Against the backdrop of central bank asset-buying and this low-rate environment, the search for yield is back on. We highlight a number of opportunities where investors can add yield to their portfolios:

USD -denominated emerging market sovereign bonds. After the sizable tightening of credit spreads in recent months, we expect less upside from capital appreciation; still, the roughly 400 basis points of additional carry relative to US Treasuries is more than enough to compensate for the underlying risks, in our view. For risk-tolerant investors, we also see opportunities in the riskier spectrum, which, if added to diversified portfolios, may add to return prospects.

Asia high yield credit. Asia high yield offers some of the highest yields within the global credit space. We continue to like the Chinese HY segment thanks to the solid fundamentals of Chinese issuers, especially property developers (the biggest sector for Asia HY), and to easy domestic liquidity conditions.

Green bonds. We see particular opportunities in green bonds, which we believe will exhibit lower volatility and smaller drawdowns compared to non-green bonds during periods of market stress, given their more defensive sector and credit profile.

Eurozone crossover bonds. In Europe, we look for select investments in the “crossover zone” between investment grade and high yield. The ECB is buying bonds, so corporate spreads should be contained, and investors willing and able to stomach the potential volatility of crossover credit investments can earn potentially significant alpha if key rating agency action is anticipated correctly.

Dividend-paying equities. Dividend payments, an important part of shareholder returns, are still attractive at current levels, particularly compared to government bond yields. While we expect dividend cuts as a result of COVID-19 (more so in Europe than the US), dividend-paying stocks tend to have defensive characteristics. We recommend selecting companies that can sustainably pay attractive dividends.