Carry opportunities (or not) in an environment of rising prices and tapering

In the current scenario of rising inflation, what are fixed income managers doing? Several of them explained at a breakfast meeting organized by FundsPeople and sponsored by SPDR ETF of State Street Global Advisor (SSGA) the carry opportunities they are finding and the instruments they are using to protect their portfolios, including ETFs. Javier Lendines, General Manager of MAPFRE AM, was the MAPFRE AM representative at the conference.

Risk is not dead

The scenario for fixed-income managers is not only complicated, but odd. Few of them have worked in markets with rising interest rates. “In the U.S. they have been falling for 40 years and in Europe, if you take the German bund as a benchmark, 30. We have reached the lows and we have to learn to manage with markets up”, says Lendines.

He also states that the search for opportunities entails structural changes in management teams. “At the end of the day, seeking returns in this environment requires taking on a little more risk in your portfolio. We have gone from a time when the traditional fixed income-equity distribution gave a reasonable return, to a time when government bonds, if we are right, will give negative returns in the next few years while equity will start to stabilize”.

That said, he explains that they are focused on looking for opportunities in short-term credit, whether in liquid or illiquid markets. The objective is to try to squeeze some profitability at the short end of the curve in order to subsequently take positions in the long term when rates have risen. He insists that this search “involves an effort of risk analysis, and also some work at explaining within the company because risk is not dead. Although we have had a few years in which the markets have been anesthetized by the ECB, the risks will reappear as stimulus is withdrawn”.