Global fund manager PIMCO said it is favouring Australian and emerging market debt amid ongoing market volatility.
"Despite Australia's steady growth trajectory, we expect markets will remain volatile as sovereign fears are weighed against positive economic news. This is creating opportunities to find value in fixed-income markets," PIMCO Australia head John Wilson said.
In its Australian portfolio strategy, PIMCO is tactically gaining exposure to the one-year markets when investors price in too many rate increases, he said.
The fund manager is also adopting a number of strategies to shed risk in the portfolio.
"To reduce risk we are overweighting AAA tranches of Australian residential mortgage-backed securities, reflecting the high quality and strong performance of the underlying loans, and ongoing attractive spreads of up to 135 basis points above bank bills," Wilson said.
"We are also targeting corporate debt in recession-resistant sectors such as utilities, natural gas pipelines and consumer staples."
Efforts to boost returns will see PIMCO targeting emerging markets debt with a focus on countries including Brazil, Mexico and Russia, he said.
"Retaining holdings of Australian inflation-linked debt and well-capitalised financial institutions, such as the big four Australian banks, will also drive returns," Wilson said.
Wilson also said investors were turning their attention to sovereign debt as the fear of Greece defaulting on its loans had raised the possibility of a developed country collapsing.
"While the support declared by European leaders and the International Monetary Fund quelled concerns of sovereign risk spreading, Greece's ability to refinance near-term debt remains a risk," he said.
"Other developed countries in this ring of fire are Ireland, Spain, France, the United States, United Kingdom, Italy, Portugal and Japan," he said.
