Western Asset Management chief investment officer Ken Leech said US treasuries have, for example, with the exception of the taper tantrum, been a “good diversifier of risk”.
“They help provide a portfolio balance and actually provided positive returns when other sectors have been negative,” Mr Leech said.
“This works particularly well in a disinflationary environment, which we feel very strongly we're in.
“You can get movement negatively in spreads and rates at the same time, so this strategy is not without some risk, but by and large … when risk to growth has been declining, risk to inflation has been declining, and spread products come under pressure, the beneficiary has been long-term US treasuries.”
Mr Leech added that in the context of the bond market, the substance rather than the timing of the US Federal Reserve rate rise is more significant.
“The bigger picture is not when and whether the Fed moves that first funds rate – inches it off zero. It’s really how aggressively and how far the Fed ultimately intends to move rates.”
Mr Leech said the Fed will move off zero, but its tightening will be slow and introduced over the long term.
“The policy path is going to be one of normalising rates in a very slow fashion. Inflation is going to be very slow to normalise and move up.
“The bond market therefore is going to have reasonably low rates for longer than market participants might [have] otherwise thought at the beginning of the year.”
Mr Leech concluded that opportunities in investment grade bonds can be found in the financial sector.
"When it comes to sectors, the total returns are not really the key," he said.
"It's really the sub-sector and issue selection ... and investment grade financials have been the best performing sector.
"Banks and finance – bank paper – will continue to improve relative to the corporate average," Mr Leech said.
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