On Fixed Income, ‘Europe Is Wild Card,’ Say Fidelity Managers: RIS 2011

Two fixed income gurus from Fidelity explore the bond universe’s pros and possible cons for attendees at the Retirement Income Symposium

Michael Schmitt (left) of Fidelity Management & Research and Jim Jordan of Fidelity Investments at RIS 2011. Michael Schmitt (left) of Fidelity Management & Research and Jim Jordan of Fidelity Investments at RIS 2011.

While many institutional investors are betting on short fixed income these days, at Fidelity, there’s a more nuanced view of the opportunities that still exist in bonds.

During a breakout session Monday in Boston at the 4th annual Retirement Income Symposium, that view was presented to a very interested room of advisors. Dan Beckman, a VP for product management at Fidelity Financial Advisor Solutions, moderated a session with two institutional money managers—Jim Jordan of Fidelity Investments and Michael Schmitt of Fidelity Management & Research Co.

First, the two managers pointed out that corporations are in very good shape from a bondholder’s perspective, and the consensus is that bond yields are more likely to rise. Treasuries are themselves up 7% to date this year, but “Europe is the wild card.”

Schmitt said that it’s a positive development that “at least they’re talking in Europe” about addressing the eurozone’s debt issue, there are three major developments to watch.

One is the potential default of Greece; the second is recapitalizing the banks; and the third is “ring-fencing Spain and Italy.” Italy in particular bears close watching, partly because, said Schmitt, it is the largest bond market in the world, while Jordan said the question is whether Europe can withstand a tight monetary policy.

Jordan then moved on to address high-yield and emerging-market debt. Junk bonds, he said, are at historically high spreads, and the market is pricing in a 50% to 70% chance of a recession. As for emerging-market debt, he noted the major change in the credit quality of EM debt: “60% or more of the (JPMorgan) EMBI (Emerging Markets Bond Index Global) index is investment grade” now, and financing costs for emerging markets have come down.  

Finally, he referenced Morgan Stanley’s global investment committee earlier this month raising its allocation to emerging markets, In the committee’s report, it said it was overweighting emerging markets due to prospects of increased growth, attractive valuations and much lower risk of recession.

As for Asia, in response to a question from an attendee, Jordan said growth in China may slow to the single digits, while the possibility exists of a real estate bubble.

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