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Private bank CIOs reveal fixed income hotspots

Citywire canvassed the views of the CIOs and investment heads of leading private banks asking which bond areas they favour

Winning a losing game in bonds

Although fixed income remains the most unloved part of portfolios for top investors, some saw volatility around Italian bonds as an invitation to enter the market.

Citywire Selector collated the views of CIOs and investment heads of leading European and Asian private banks to understand more about their latest asset allocation calls. In this exclusive report, we asked them about their major overweights, underweights and the biggest contrarian calls on their agendas at the end of Q3.

The heatmap above demonstrates where top allocators stand on the most popular sub-asset classes in the fixed income space. These views form the part of a wider, dedicated publication which covers equities, fixed income, alternatives and additional investment thinking.

The full publication 'Super Allocators: What private bank CIOs backing and avoiding' can be found here.

*Views collated by Citywire Selector and Citywire Asia teams. Verdict by Margaryta Kirakosian.

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Winning a losing game in bonds

Although fixed income remains the most unloved part of portfolios for top investors, some saw volatility around Italian bonds as an invitation to enter the market.

Citywire Selector collated the views of CIOs and investment heads of leading European and Asian private banks to understand more about their latest asset allocation calls. In this exclusive report, we asked them about their major overweights, underweights and the biggest contrarian calls on their agendas at the end of Q3.

The heatmap above demonstrates where top allocators stand on the most popular sub-asset classes in the fixed income space. These views form the part of a wider, dedicated publication which covers equities, fixed income, alternatives and additional investment thinking.

The full publication 'Super Allocators: What private bank CIOs backing and avoiding' can be found here.

*Views collated by Citywire Selector and Citywire Asia teams. Verdict by Margaryta Kirakosian.

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Stuart Parkinson, HSBC

Underweight as an asset class. The biggest recent allocation change was go overweight in hard currency bonds in South Korea, Brazil, Mexico and the GCC, and local currency bonds of Mexico and China.

Major overweight in US high yield and underweight German Bund. Contrarian call is that US Treasuries should range trade and the recent spike in 10-year yields is overdone.

 

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Richard De Groot, ABN Amro

We have further decreased credit exposure, but have not yet reinvested in European core government bonds. The proceeds have been invested in MBS, where we see more interesting returns.

Going forward this will continue to be a struggle. Within bonds, there is lots to sell, but not much to buy. At least not for euro-based investors.

 

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Philipp Bärtschi, J. Safra Sarasin

At the end of Q3 we increased our EM corporate bond exposure, which is currently our biggest overweight. We are underweight government bonds, while our strongest contrarian call is being underweight high yield. As a next step we might increase the duration of USD bonds.

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Michael Strobaek, Credit Suisse

Most recently we increased our US government bond exposure and our major overweight is hard and local currency EMD. The biggest underweight in bonds is traditional investment grade bonds, but we have a neutral view in terms of interest rate exposure. Our strongest contrarian call is overweight EM bonds.

 

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Markus Stadlmann, Lloyds Bank Private Banking

On bonds, we went overweight government debt, which coincided with a strong move into EM hard currency bonds. The current largest overweights are US government debt and US inflation-linked debt, while remaining underweight eurozone debt. We expect to further increase sovereign debt in the coming months.

 

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Mark Haefele, UBS Wealth Management

The biggest, most recent allocation in fixed income was to add Italian two-year government bonds (duration overlay). Our major overweight is EM US dollar-denominated bonds, while our major underweight is high grade bonds. Our strongest contrarian call is being long US 10-year treasuries and having exposure to Italian two-year bonds.

 

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Manuela D’Onofrio, UniCredit

Generally underweight, with the biggest underweight position in global high yield and EM local currency bonds. Major overweight in flexible/unconstrained bond funds, which was also the biggest recent allocation change.

Strong underweight global high yield vs competitors is our contrarian play. We are monitoring entry points for a long-term accumulation strategy on US treasuries and EM bonds.

 

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Han Dieperink, Rabobank

Our biggest contrarian call is Italian government bonds, while we don’t see adequate risk/reward in Spain or France, where there risk premium is not priced in. We also like 1 Tier financial CoCos and tend to avoid everything with negative rates.  

 

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Frédéric Lamotte, CA Indosuez WM

Our allocation is stable, both in euro and US dollar. In euro-denominated portfolios the biggest overweight is high yield, while investment grade is the biggest underweight.

Our strongest contrarian call is to be overweight Chinese debt in US dollar and yuan. Next quarter we are most likely to increase bank debt and duration in US dollar buying 10-year Treasuries at 3.20%.

 

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Florent Brones, BNP Paribas WM

Our major overweight within fixed income is to investment grade corporate bonds, as well as within emerging market local currency debt. This latter position is also arguably our strongest contrarian call at present. We are underweight both US and German government bonds.

 

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Enrique Marazuela, BBVA

We don’t see any value in government bonds. There is a lot of asymmetry in the yield curves and there are a lot of potential losses for a very small return, especially in Europe.

With corporate bonds, for both IG and HY, we are neutral right now. We see an opportunity in EMD, both hard currency and local currency, on a long-term view.

 

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Christian Nolting, Deutsche WM

Our most recent move was to increase duration, which is now neutral, as well as exposure to short-term Italian government debt. Our long position here is our biggest contrarian call.

Our major overweight is hard-currency EM bonds, while the biggest underweight is developed market sovereigns.

 

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Carlos Díaz Núñez, Santander

We have a mix of underweight and neutral positions in fixed income. Our most recent big change was to increase duration in the US. We have a major overweight in floating rate notes and underweight in European government bonds.

A contrarian call is a strong underweight in high yield bonds. We may increase our US investment grade allocation to overweight if the market continues to adapt to the Fed´s rate hikes outlook for 2019.

 

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Bob Homan, ING

Most recently we increased EMD exposure from neutral to overweight, which remains in place and is our strongest contrarian call. Our major underweight in fixed income is duration, which is really low at around three years. We might step up our duration if European rates move higher.

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Arne Hassel, Barclays

Looking at the past quarter, we took the opportunity to neutralise the underweight that we had held in high yield bonds. We are not positive going forward and are not overweight anywhere here. Our major underweights, which look likely to stick, are in corporates and developed market sovereigns.

 

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Chris-Oliver Schickentanz, Commerzbank

Bonds offer only limited potential, and the eurozone is especially susceptible to correction risk. Accordingly, we have placed higher-quality government bonds in reserve.

 

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Yves Bonzon, Julius Baer

The allocation to bonds remains unchanged at 41% in a balanced portfolio, with the biggest exposure to investment grade (19%) and EMs (6%). Given the ‘stable outlook’ by Moody’s, the risk of Italian bonds going down to junk status is limited for now.

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Teng Hwee, UOB Private Bank

Our most recent move was to overweight Asian high yield after the sell-off, which is our biggest exposure at the moment and our most contrarian bet. In the bond space we are underweight sovereign bonds. We might upgrade investment grade bonds in the next quarter.

 

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Siriporn Suwannagarn, Kasikornbank

We are moving out of local currency and towards USD Asia Pacific bonds and extended duration. Our major current overweight in bonds is USD Asia Pacific bonds, while our major current underweight is local currency EM bonds. Our strongest contrarian call is relatively low duration.

 

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Hou Wey Fook, DBS Private Bank

We are underweight the asset class as a whole. We haven’t made any recent changes to our allocation in fixed income, where the major underweight is in developed market government bonds. We are neutral on EM government and corporate bonds.

 

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Verdict

Being underweight bonds is still consensus that top allocators have since the second quarter of 2018 as according to one CIO within bonds “there is a lot to sell but not much to buy”.

Nevertheless, the emerging markets debt space, especially its hard currency part, is leading the way with countries like Mexico and China attracting most attention in Q3.

Very few investors got spooked by volatility in the US treasuries and top allocators stayed invested in 10-year Treasuries. Meanwhile despite eurozone offering very little in terms of returns some CIOs decided to implement a contrarian move and add on Italian short-dated debt.

In the fourth quarter some super allocators are considering adding more to their sovereign bonds exposure in the US as well as selected EMs.

 

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