Where to find better bond yields

As Europe struggles to get its collective fiscal house in order, investors have been extremely cautious. Equities have proven aptly named as “risk assets”, but yields on major “safe haven” bonds have been compressed to nearly negative real returns.

Is there hope for the bond investor seeking real yield?

“There are always opportunities in the global bond space,” says Patrick Bradley, senior vice-president at Brandywine Global Investment Management. “There’s usually a country that is performing very, very well, and a country that is performing very poorly. We try to invest in the countries that we think will do well.”

He says Latin American countries are especially promising. Mexican bonds, for example, meet one of his core criteria of having high real yields.

“An increased share of global economic activity is being produced by developing economies,” he says. “Already credit ratings of these countries are improving; Brazil has an investment grade credit rating.”

Australian bonds are also attractive, because they offer a decent spread versus U.S. bonds, and its resource-based economy is closely linked to that of China.

“Our long term strategy with bonds is to own the bonds with the highest real yields—by real yields we mean the interest rate, less the trailing 12-month rate of inflation,” he says. “We think that’s the way an investor will increase their returns and preserve capital.”

But the key in global bond investing is to hedge currency exposure, which may sound counterintuitive: if you think the country is strong enough to buy its bonds, why waffle on the currency?

“We will hedge currency, even if we own the bonds of that country, if we think the currency is over-valued,” he says.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.