Bond Bears to Take Down Credit and Emerging Markets, SocGen Says

(Bloomberg) -- Societe Generale SA is telling yield-seeking bond investors to give up the ghost: they can no longer bank on dormant inflation underpinning risk bets, from credit to emerging markets to long-dated government debt.

“The bear market in rates has started, and with it credit, and eventually emerging markets, should both come under pressure,” strategists led by Brigitte Richard-Hidden wrote in a note to clients distributed Monday. “There has been a regime shift in the market, which implies further increases in yields.”

With that warning, SG strategists advise taking “defensive” positions in short-dated debt, inflation-linked notes and Japanese government securities benefiting from a central bank taking a slower approach than peers to rate normalization. Turning risk-averse -- even if it means sacrificing income now -- will be worth it in the long run, they say.

“The key for fixed income portfolio investors from here to the summer should be avoiding capital losses,” according to the note. “A loss of running yield is an acceptable price to pay.”

The French bank joins fund manager Michael Hasenstab in betting that central banks will move to rein in accelerating inflation with faster-than-expected rate increases. Hasenstab, Franklin Templeton’s bond chief, is using interest-rate swaps to push average duration in the flagship Global Bond Fund to below zero and the shortest on record.

“Any retracement in rates should be considered as opportunities to add to shorts,” according to SG. “The curve is not pricing in sharp enough moves in rates in 2019.”

The strategists are “most wary of” and least exposed to core European sovereign markets poised for steeper repricing. They expect the region’s growth to remain strong, with the European Central Bank moving close to a rate increase early next year, and see 10-year bund yields rising to 0.85 percent by the end of the year, from around 0.76 percent currently.

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net.

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Joanna Ossinger, Sid Verma

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