Fixed Income Asset Allocation Insights: Opportunities are Emerging in Emerging Markets

Spreads on emerging markets debt appear relatively attractive, and fundamentals are slowly improving.

Robert Vanden Assem, CFA
Head of Investment Grade Fixed Income and Chairman of Fixed Income Asset Allocation Team

Credit spreads have come under pressure because of higher volatility in equity markets, heavy outflows from retail investors in mutual funds and exchange-traded funds (ETFs), a busy new issue calendar, and lower oil prices. We believe the decision by Republican leaders to pull health care legislation may actually be a positive outcome for risk assets because it clears the path for a shift toward tax reform. We increased our allocation to emerging markets (EM) debt to 15% from 10% and reduced our allocation to securitized assets to 15% from 20%. We maintain allocations to high yield and investment grade credit of 40% and 30%, respectively. Spreads on EM debt appear relatively attractive, particularly when you look at the corporate investment grade space and in the context of positively trending fundamentals. Meanwhile, MBS spreads could be pressured as the looming tapering of Fed balance sheet assets could again become a concern for investors.

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