According to the global fixed income manager’s senior product specialist Mike Zelouf, the US Federal Reserve must focus on more innovative forms of monetary stimulus. He says: “With Treasury yields at historic lows, and potentially trillions of dollars of new government issuance in the pipeline, it is appropriate to reduce durations in the U.S. back to or even slightly below benchmark levels with an emphasis on shorter-dated yields.”
Zelouf believes the currency markets have been “burdened” by short-term technical trading and extreme volatility. He says global rebalancing will take years and a number of currencies continue to look substantially misaligned.
As such, Western Asset has reduced its currency exposure and aims to maintain minimal foreign exchange strategies in the near term. Zelouf believes it advisable to wait until there is a clear value proposition before foreign these are re-implemented with significance.
He remains overweight in non-government sectors and maintains a focus on investment grade corporate debt, favouring select names in the financial sub-sector. He says: “Our preference is for European financials, particularly subordinated debt that had not been over reliant on real estate lending. Where permitted, we feel that high-yield debt offers compelling relative value, as do US agency mortgage-backed securities given the Fed’s buying program and the high level of implied volatility that has been priced in.”