Fixed income has often been disregarded as yields have steadily declined over the past three decades. Nonetheless, RBC BlueBay Asset Management contends that making minor adjustments to one’s investment strategy can be instrumental in seizing returns and mitigating risks within core government bond allocations.

“Portfolio managers with the right approach can consistently target significant alpha over the benchmark, adding a boost to returns…the important ingredients for active alpha are the right opportunity set, dispersion, proprietary analysis and strong fund construction and risk management,” writes Kaspar Hense, BlueBay Senior Portfolio Manager, Investment Grade team. 

Subsequently, Hense highlights that expanding beyond domestic markets to global government bonds can enhance investment opportunities. According to him, currency hedging is a crucial consideration when going global, as it can impact yields. Additionally, diversifying across 45 countries and 27 currencies within the global sovereign bonds asset class can raise yields and improve credit quality, he adds. 

Meanwhile, David Horsburgh, Head of Client Solutions at RBC BlueBay Asset Management, points out that the Covid-19 pandemic disrupted global trade and inflation dynamics. He opines that central banks around the world have responded differently to these challenges, creating a dislocation in monetary policy. As per Horsburgh, this economic dislocation has generated opportunities for active investors to develop trade ideas and capitalise on varying economic conditions. 

“An asset class (global government bonds) that spent the last decade having little to no yield is now higher yielding and rich in distortion, with inverted yield curves implying different future expectations, creating outright long, short, and relative value opportunities,” says RBC. 

The asset manager maintains that while the economic trajectory remains uncertain, it represents a favourable backdrop for proactive investors seeking to generate returns in this domain. Additionally, it anticipates that the ongoing disruption creating new opportunities will persist at a structurally elevated level for an extended period.

“This, combined with the dual benefits of diversification and a strong return profile, offers a compelling reason for active global sovereign bonds to play an important role in asset allocation,” concludes Hense.

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