As summer has drawn to a close, Bryn Jones, head of fixed income at Rathbones, shares his views on the latest influences driving credit markets; yield curves steepening across government bonds, and notes the behaviourial shift from TINA, “There Is No Alternative” to equities to TANIA, “There Is Now Investment Alternatives”.
The fixed income executive also discusses the rise of passive investing, its impact on markets and how active managers are seeking to navigate margin pressures and differentiate themselves to remain competitive.
Looking ahead, Jones unpacks what else is on his radar for the rest of the year and looks at what active managers should be paying close attention to over the next few months.
Interview
Jo Gallagher Describe the current credit market conditions and what’s informing your investment and trading strategies.
Bryn Jones, Rathbones Right now, we’re seeing [that] government bond yields [are trading] quite high. At the long end, we’ve seen a steepening of curves across major economies, UK, US, Germany, France, Japan. This has created a situation where all-in yield, some longer duration assets now is quite attractive. In some cases, 6%, 7% for a good corporate. We’ve gone from a period of TINA, “There Is No Alternative” where people are investing in equities, to TANIA, “There Are Now Investment Alternatives”. We’re starting to see flow into credit, which has driven credit spreads tighter as investors are attracted to this all-in-yield. At the same time, there are other dynamics going on, such as the Dutch Pension Reform, which is going to come in next year. And this means that some long bonds which are being used for asset liability matching purposes in Europe and the swaps related to that may get unwound, which would have a negative impact on the long-end of the curve. While investors elsewhere still look at the attractive breakeven duration at the front end of the curve driving down spreads further down the curve. These dynamics are going on through the year so you might find retail investors and institutional investors like sub-15 year credit whereas longer duration credit might come under risk because of the unwind of the Dutch Pension Scheme.
Jo Gallagher The rise of passive investing across equities and fixed income is a major trend. What impact is that flow and growth having on market dynamics such as liquidity, volatility and spreads?
Bryn Jones, Rathbones Yeah, we’ve seen an increase perhaps up to 50% in investment-grade credit going into passive funds. And arguably, they become buyers of bonds at perhaps the incorrect price, they’re forcing prices up further and spreads tighter. At the same time, when you get periods like “Liberation Week” and you get volatility, you’re seeing investors coming out of credit and bond prices moving increasingly more. Really, that provides opportunity during that volatility to add to some credit risk when people are being fearful. As active managers we can take the other side of that. The other point is that we’ll find that index bonds tend to perhaps be overpriced and they’re sitting off the benchmark where they’ve got interesting characteristics whether it be the capacity to pay or whether they’ve got very strong covenants. We’re able to go to our brokers and our traders and find some off benchmark ideas which are much more attractive to investors.
Jo Gallagher In response to the rise of passive, how have active managers had to navigate these pressures and differentiate themselves this year?
Bryn Jones, Rathbones Well, look, you know, right now, businesses that are borrowing more money will become a larger part of an index. That means that when they come to refinance, they rely on the credit market. Now, the passive funds are forced to buy those large companies. They might not be the best companies because they’re taking on more debt. So we can already differentiate ourselves in that regard. When it comes to new issues, where initial price talk from the brokers comes out, It might trade for their value. And it goes into the index, the passives have to buy it. We can make a choice as active managers. We can say, actually, that doesn’t look like good value right now, so we’re not going to touch it. Falling angels, rising stars, clearly when bonds fall out of an index, they become full sellers. We might actually want to buy them after they have fallen. And similarly, we can hold bonds that sit in high-yield, for example, that we feel might get upgraded to investment grade. And when they do, we can make significant gains from that. So active managers in fixed income investment grade can differentiate themselves quite significantly from passive houses.
Jo Gallagher Looking ahead, what else is on your radar for the rest of 2025 and what would you advise active managers to pay attention to over the next few months?
Bryn Jones, Rathbones Well, spreads have contracted in over this year. And so what we’ve been doing in the portfolio is reducing some risk at the margin. Taking out some tier two bank debt, moving it up the cap structure into seniors, maybe a little bit of an extension trade because GILT yields have risen. We’ve been buying a few asset-backed securities where we can as a defensive measure, because when you get risk off events, ABS (Asset-backed Securities) tends to trade quite flat. Good quality AAA trades around a hundred with this weakening US employment picture, weakening employment picture in the UK. Perhaps inflation might come back down a little bit. Clearly, if we do get inflation dropping, you’re likely to see a bear flattening of the curve and de-risking duration trades probably makes sense.
Jo Gallagher Thank you Bryn for your insight and of course you for watching. This has been Trader TV This Week.
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