Fixed Income Strategy: Relative Value In Dollar Bloc Financials

Our fixed income team has been advocating an overweight position in the investment grade financial sector relative to non-financials within the U.S. fixed income market. But what about outside of the U.S?

Global Fixed Income Strategy

T he U.S. economy still has several years left to delever but the worst is past. Meanwhile, the Australian deleveraging cycle is just starting, while Canadian debt loads should peak soon. The relatively advanced stages of the deleveraging cycle and the recovery in the U.S. housing market are important factors that support our preference for U.S. Financials compared with those in Australia and Canada.

In the U.S., the peak in doubtful loans occurred about two years after the peak in overall leverage. If we assume approximately the same lag for the commodity countries, Australian banks are beginning to feel the pinch, and Canadian banks should soon.

If house prices fall while consumers are deleveraging, growth would falter and banks balance sheets would worsen. On the margin, these trends are negative factors for credit quality and for Financials spreads in Canada and Australia. Still, bad debt levels are unlikely to spike in these countries and bond markets have been unfazed by the recent rating downgrades.

Apart from being relatively vulnerable to deleveraging factors and housing market weakness, these smaller markets offer no yield advantage. As a result, our Global Fixed Income Strategy service recommends focusing the Financials vs. Non-Financials overweight in the U.S. and a neutral allocation between these two sectors within Canadian and Australian markets.

Print Friendly
Macroeconomic Research
About BCA Research

BCA Research is a world leading provider of independent investment research. Since 1949, the firm has provided its clients with leading-edge analysis and forecasts of the major financial markets, with clear and focused investment strategy recommendations and backed by countless proprietary models and leading indicators. Asset class coverage includes equities, fixed income, currencies, real estate, commodities and geopolitics. The firm provides its services to financial professionals across six continents, through a wide range of products, services, and meetings. BCA maintains a head office in Montreal, with local offices in New York, Los Angeles, London, Hong Kong, Sydney, and Buenos Aires. Not yet a client of BCA? Take a short trial to our research.

Speak Your Mind