Fixed Income Opportunities Abroad

Terry Flanagan

It’s headlined that asset managers have shunned U.S. debt throughout the fragile global economy, particularly consumer and government debt. Corporate debt, though, is another story.

‘The fixed income world has three balance sheets; government, consumer and corporate. The corporate balance sheet is in the best shape of all,’ said Colin Lundgren, head of fixed income at Columbia Management. Columbia Management is the eighth largest long-term asset manager in the U.S. with north of $300 billion in assets under management.

‘Corporate CFOs and treasurers did a terrific job in 2008; bringing down leverage, raising cash, and becoming less reliant commercial paper. Overall, the credit market looks good which leads into opportunities for investing,’ Lundgren told Markets Media. ‘Credit is a big theme in our portfolios.’

However, not all debt is created equal. ‘Not surprisingly, we’re seeing more and more interest in the corporate area, over government debt, or consumer related debt.’

Needless to say, government debt is subject to the fiscal ills currently facing the nation. Treasuries, or risk-free assets, have essentially become return-free. Consumers, plagued by a lagging housing market, are ‘in over their heads’ regarding their savings rate, according to Lundgren.

Investment grade, high quality bonds are leading the fixed income market, followed by those lower on the credit spectrum, and even high yield instruments, such as high yield loans, noted Lundgren. Such a picture presents a vast difference from five years ago, cited Lundgren. ‘Then, there were only a few searches for investment grade corporates solely; U.S. treasuries were a larger component of the Barclay’s Capital Aggregate Index.’

Institutions have changed their fixed income outlook, as well, said Lundgren. What was once a preference for bond indexes as a whole has now become a spotlight on certain components. ‘It’s a core blend of high quality assets,’ Lundgren said.

Of course, as is the case with many equities, the emerging markets may also hold the future for fixed income.

Mature markets are experiencing ‘weak economies, and fiscal challenges,’ according to Lundgren. ‘The fiscal situation in the U.S. and other developed markets is overvalued, and there should be a bigger penalty for it,’ he said. ‘The markets don’t appreciate the good shape some of the emerging countries are in’strong fiscal conditions are undervalued.’

Emerging market economies plus emerging market companies spell a recipe of success for Lundgren. ‘Companies are still generating decent earnings in this environment. There are still good places to invest’abroad and in the credit market.’

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