What Bonds to Buy After the Fed Meeting

 | Apr 28, 2016 | 8:00 AM EDT
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The Federal Reserve once again gave investors the gift of time. Its statement after the April meeting yesterday afternoon was dovish enough to persuade many analysts not to expect it to raise interest rates until December.

This gives fresh impetus not just to equities, but to bond markets as well. Fixed income has been in a giant bullish market for around three decades, and this looks likely to continue, at least as long as the Fed remains so accommodative.

U.S. Treasury yields fell by between two and six basis points along the curve following the FOMC meeting, reflecting market expectations of a Fed that is in a "lower for longer" scenario.

Equity markets in Asia and Europe were softer on Thursday morning, but this is partly because the Bank of Japan stood firm, refraining from further stimulus to the economy.

Steen Jakobsen, strategist at Saxo Bank, said the Fed meeting was a "big non-event" except for the fact that it confirmed the central bank was "in no hurry to move." His bank believes there is a 60% chance that the U.S. will "flirt with recession" this year and his investment call is simple: be overweight 10-year and 30-year Treasury bonds.

A similar strategy is suggested by Vincent Chaigneau, head of fixed income and forex strategy at Societe Generale, who says the Fed's decision supports long duration bonds.

In fact, strategists at the French bank moved to "overweight" from "underweight" U.S. Treasuries even before the Fed's decision, as they want to "play it safe" into the summer.  

Chaigneau recommends going neutral U.S. corporate bonds, however, because the asset class enjoyed an eight-week rally that makes it unattractive to enter now.

Some strategists are attracted to emerging markets debt, because the asset class has finally begun to see some inflows after spending a long time in the doldrums. Chaigneau, however, points out that "Asia's default problems look set to get much worse in the coming months, even if Chinese data have taken a turn for the better."

And, of course, he recommends that investors go long European corporate bonds, as the European Central Bank's corporate bond purchasing program is set to start in June.

This highlights another reason why it would be a good idea for investors to go long investment-grade bonds, despite the fact that they have been into an almost uninterrupted 30-year rally: central banks' purchases have created a shortage of safe assets.

As analysts at Oxford Economics point out, this has depressed long-term yields across the globe. They calculated that the total amount of "safe" assets -- advanced economies' government bonds, but also other investment-grade rated debt -- has shrunk to 40.4% of world GDP last year from 49.5% in 2007.

This shortage of safe assets is likely to continue because, as the share of emerging markets in world GDP increases, they will issue fresh debt and a lot of it is below investment grade. On the flip side, investors with a high risk appetite could see this as a great opportunity.

If fixed income is not your preferred asset class, take a look at these stories from Real Money and Real Money Pro for other investment ideas:

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