Bonds seek stories and returns

15 January 2014

With the year 2013 just ended and already in the distant past, financial markets opened the new year with a different and, finally, more balanced approach. Where does the credit lie? “Mostly with the Federal Reserve,” says Vittorio Fontanesi, a member of Kairos Partners’ management team. “The US central bank has provided genuine support to rebalancing the market with the soft tapering implemented in December. This has finally contributed to strengthening the conviction that we are not necessarily its slaves”. This means that it is no longer the tapering that makes the rules, as was the case up until not long ago,  and this is a positive development in a context that does not look as if it will be an easy one for bonds, which have now nearly peaked and which are showing extremely low yields.

“We are at the start of the year and the desire to invest and reinvest is tangible. However, nothing should be taken for granted and we must take a prudent approach and pick individual stories. These include Portugal, one of the leaders in the recent rally in the periphery: a bond that had already been on the market was re-issued, and was very well received”. The numbers speak for themselves: Euro 3.250 billion was printed, with demand of well over 10 billion. “Moreover,” added the manager, “this performance renews the possibility of ECB support for the country should it undergo difficulties, as the ability to refinance on the market is a pre-requisite for aid.”On the other hand, two other countries that have made global headlines for different reasons, Brazil and Turkey, are not faring quite so well: “The current uncertainty and social issues in Brazil and the corruption scandals in Turkey call for prudence, but with the presidential elections around the corner – to be held in August and October, respectively – this could all change very quickly”.

Ireland is also performing well, having recovered quickly from the verge of default. “The Irish economy is substantially based on finance, and in a tax haven like this, it was destined to resume generating excellent performances”, noted Vittorio Fontanesi, while urging investors to exercise caution with South African bonds, as that country’s economy faces pressure due to an unfavorable trade balance.