Conway, speaking at a recent media briefing in Hong Kong, said if the European Central Bank was to slow its bond buying any further, for example, it would likely have the biggest impact on long-duration bond yields.
The ECB is not expected to make any major moves at its January meeting this week having recently reduced the amount of bonds it buys each month.
However, after its last meeting in December when it made the move to cut back bonfd buying, short-dated bonds in Europe rallied on the news, while longer-dated bonds moved in the opposite direction, according to a Financial Times report.
Rate hike factor
Investor expectations for a spike in inflation will also be reflected in long-duration bond yields, Conway added.
The firm is not overly-concerned about interest rates, but it believes that investors are not getting compensated for the risk they are taking.
“We are more prepared to take credit risk rather than interest rate risk, so we are trying to avoid interest rate volatility and get some of our returns through [assets] that are more visible,” she said.
Conway said that investors can get visibility and stability from short-duration bonds. Investors can look at companies’ balance sheets and determine if they are able to repay their debt over the next two-to-three years, she explained.
“Short is sweet, so stay at the short-end of the yield curve.”
Conway likes short-dated investment grade credit and short-dated high yield, while avoiding bonds with a triple C rating.
She also favours short-dated real estate, as it is a good hedge for inflation. Floating rate notes are also a good choice, she added.
EM fixed income
Conway is in the growing group of analysts who believe investments in emerging markets this year are attractive.
According to her, global growth in 2016 was driven by emerging markets, especially from the biggest countries, such as China, Russia, Brazil and India.
Russia and Brazil, in particular, have increased their growth trajectory because they are coming out of severe recessions, she said. China has benefited from fiscal stimulus, but it remains to be seen whether its growth is cyclical or structural, she added.
However, investors should be concerned about emerging markets if they believe that the US dollar is on a stengthening trend. She therefore suggests short-duration issuance in emerging markets.
