Scott Thiel, deputy chief investment officer and head of European and global bonds at BlackRock, is someone that has probably seen it all before when it comes to the bond markets.
A member of the fixed income executive committee and the EMEA executive committee at the firm, which has $4 trillion of assets under management, he spent 13 years at Goldman Sachs before joining BlackRock in 2002. He is still somewhat baffled, however, by recent market behaviour.
“The amount of interest in the Greek new issue was extraordinary and the price was extraordinary,” he says. “The periphery has fallen prey to the yield grab.”
 |
| “The amount of interest in the Greek new issue was extraordinary and the price was extraordinary. The periphery has fallen prey to the yield grab” - Scott Thiel, BlackRock |
Greece returned to the bond markets in early April with a €3 billion five-year deal that paid just 4.95% but attracted over €20 billion in orders through Bank of America Merrill Lynch, Deutsche Bank, HSBC, Goldman Sachs, Morgan Stanley and JPMorgan.
No advantage
“For Greece to attract the level of interest it did for five-year bonds paying 4.95% looks like an extraordinary dismissal of the fundamentals. To judge that price as appropriate it seems to me investors must be taking a view that European official institutions and the IMF are likely to somehow forgive Greece its official-sector debts. As to whether or not they will do that, I have absolutely no comparative advantage over any other fund manager in coming to a view. What I can tell you is that the level of risk we are running today is at one of the lowest levels ever.”
Thiel’s disquiet at the Greek deal’s reception is indicative of his broader concern over the weight of current investor interest in Europe’s periphery.
“Our initial investment in Portugal came from the belief that EU membership was unchangeable, coupled with a fundamentally improving view on the country. Over the last month, however, this has shifted from a Portuguese fundamentals story to an ECB quantitative easing story and I don’t share that view. Valuations are now too stretched and we are getting out,” he tells Euromoney.
With persistent secondary market illiquidity the ease with which he will be able to do that is, however, a constant cause for concern.
“You have to factor in the lead time around portfolio positioning. Inventories are very low as dealers are simply not paid to do this any more. There is very good liquidity on the offered side, but very poor liquidity for securities on the bid side. If you are exiting a position you have to go back to the emerging markets adage of buying when everyone else is selling and selling when everyone else is buying,” he adds. “This is now the case in most asset classes, which is absolutely incredible.”
With the global bond index now yielding roughly 2% (having yielded 4% just five years ago) Thiel reckons that a rate change of just 30 basis points is enough to result in negative returns.
“If carry is a critical component of your strategy, that is expensive. If monetary policy is executed to perfection – for example, the ECB undertakes quantitative easing and the Bank of England raises rates – you could potentially realize that carry, but that is a very tough call,” he says. It is therefore of little surprise that BlackRock is running risk at historical lows. “Many assets look very expensive. Our high-yield and emerging market allocations are very low as these asset classes are very expensive and very subject to retail flows.”
Identify opportunity
But even BlackRock has to find yield like everyone else, and Thiel emphasizes the importance of identifying what opportunity is still there.
“We are trying to focus on idiosyncratic opportunities across the market,” he says. These are mostly to be found in US structured credit, particularly “story” credits in the ABS, CLO, CMBS and non-agency RMBS markets.
Thiel also sees value in parts of the long-dated muni bond market as a result of retail investors selling and further “story” credits such as Puerto Rico and Detroit.
The desire to minimize both risk and volatility means that along with focus on these two parts of the market, Thiel, who is lead manager on BlackRock’s Fixed income global opportunities fund, World bond and Global government bond funds, is also concentrating on 30-year treasuries as well.
Idiosyncratic assets with higher barriers to entry should provide more protection against rising volatility, as will layering broader strategies on top of asset selection.
“You can deploy macro strategies over this: for example, the European five-year has outperformed the US five-year by 1% in a reflection of central bank policy. There are lots of things you can do to protect the portfolio from downside risk,” Thiel says.
