Allianz Investment: Prefers a short-term strategy for U.S. Treasury bonds as inflation risks remain
Allianz Investment tends to adopt a shorter-term strategy for U.S. Treasury bonds due to the ongoing risk of re-inflation. Inflation in the Eurozone has eased, and the European Central Bank has lowered interest rates to 3.25%, with the market expecting further rate cuts in the future. Allianz is optimistic about investments that benefit from a steepening yield curve, including German and U.S. bonds. The performance of companies in the third quarter varied, with utilities and financials performing well, while cyclical consumer goods were weak. In a high-interest-rate environment, the outlook for the financial and utility sectors is optimistic
According to the Zhitong Finance APP, Allianz Investment stated that the trend of easing inflation in the Eurozone continues, with the European Central Bank lowering interest rates by 25 basis points to 3.25% in October, in line with market expectations. At the same time, its statements have become more "dovish," with some market participants expecting a 50 basis point cut in December. As it stands, this seems somewhat far-fetched, but it cannot be ruled out that the European Central Bank may cut rates multiple times in succession. The short-term interest rates affected by policy may support a further steepening of the yield curve. Allianz Investment prefers a shorter-term strategy for U.S. Treasury bonds, as they should trade within a broader range—as long as U.S. economic data remains stable, while the re-inflation risks brought about by intensified trade protectionism under the Trump administration remain a concern.
The longer end of the Euro yield curve is easily influenced by complex market dynamics (national fiscal policies and the global economy). Allianz Investment is optimistic about investments that steepen the yield curve in their portfolio, including Germany and the U.S. Additionally, with recent yield recoveries, from a strategic allocation perspective, duration risk and fixed-income returns are becoming increasingly attractive overall. The relative value of U.K. government bonds is particularly prominent compared to German government bonds.
In terms of credit, companies are gradually announcing their third-quarter results. In investment-grade credit, utilities led in the third quarter, followed by financials and then industrials. The slowdown in asset value declines has driven a continued recovery in real estate. Cyclical consumer goods have lagged, with the European market showing clear weakness, as several companies in the automotive and retail (especially luxury goods) sectors have lowered guidance or issued profit warnings.
Allianz Investment believes that investment-grade credit is currently trading at fair value, with the market re-pricing for strong fundamentals across most industries while reducing concerns about future growth, improving the value of Euro-denominated debt. The advantages brought by the high interest rate environment, combined with relatively better valuations in industrials, continue to favor the financial sector. Additionally, they are optimistic about utility companies regulated by the U.S. and their defensive characteristics.
In the high-yield sector, the performance of U.S. dollar bonds in the third quarter outperformed Euro-denominated bonds, with CCC-rated and distressed credits leading returns among other ratings. The primary market remains active, with an ideal issuance schedule ahead. While maintaining overall risk exposure close to benchmark levels, Allianz Investment expects sectors such as telecommunications, leisure, and banking to outperform energy (dragged down by falling oil prices), automotive, and media sectors. Default rate expectations are relatively mild, with spreads narrow, but absolute yield levels remain attractive.
Year-to-date, Asian high-yield U.S. dollar credit continues to significantly outperform other credit markets, with a total return of 16.05% according to the JPMorgan Asia Credit (JACI) non-investment grade index, undoubtedly aided by China's introduction of more stimulus measures. Compared to a few years ago, the Asian high-yield bond market is now more diversified, with China accounting for 25% of the JACI market value, down from about 50% in 2021, and the share of the Chinese real estate sector is less than 10%, previously at 35%. Consumption, finance, and utilities currently account for half of the index.
In other spread assets, Allianz Investment holds an optimistic view on emerging market external sovereign debt, as funds are flowing back into this asset class. Some countries have significantly outperformed others year-to-date, including Ecuador, Egypt, Pakistan, Lebanon, and Ukraine, which are countries that Allianz Investment holds in higher proportions This year, multiple debt restructurings have been completed, including some projects that were stalled due to the COVID-19 pandemic. Allianz Investment believes that no significant credit events will occur in 2025, as large maturing bonds are primarily concentrated among issuers supported by International Monetary Fund programs