Our Fixed Income Top Picks
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Hungary: Inflation in July declined to 1.2% YoY much below the expectations; it seems the exchange rate has started to work
Hungary's headline inflation decreased to 1.2% year-on-year in July from 1.7% in June. The published data was lower than the consensus (1.5%) and our forecast (1.6%). The lower-than-expected inflation was widespread among the main inflation categories.
Glencore: excellent performance, higher dividend
Glencore, one of the world’s largest diversified mining companies, released its H1 earnings report yesterday, which showed strong results. The company exceeded analysts’ expectations across all key financial lines, and a significant improvement is also evident on an annual basis. Higher commodity prices greatly contributed to this performance, and Glencore also took advantage of the trading opportunities created by the war in Iran. In light of this, management has increased the dividend and announced a share buyback program. For now, we are keeping the stock on our Equity Top Pick List.
Although forint-denominated assets are currently performing exceptionally well, we still consider it important to diversify the bond portfolio by currency, which should be achieved through euro- and dollar-denominated regional government bonds, as well as euro- and dollar-denominated securities issued by highly rated companies. Currency diversification is not a stance against forint-denominated assets, but is necessary to reduce concentration risk. In our analysis, we have selected instruments linked to fundamentally stable issuers that offer acceptable yields in the current market environment.
Historically, U.S. corporate bond spreads remain at very low levels, although they have risen slightly recently due to the conflict in Iran. Spreads for investment-grade (BBB) bonds are hovering just above 1%, while those for BB-rated bonds (1.72%) are also close to their lows (1.56%). We saw similar movements in the European high-yield bond segment; the spread rose from 2.60% in February to as high as 2.96% by mid-April, but it remains well below the long-term average.
Euro-Denominated Corporate Bonds
Yields on corporate bonds remain at low levels, even though the conflict in Iran has caused a slight increase. At the same time, as we get closer to the end of the war, risk appetite is returning to the capital markets. There is only a very minimal yield premium, if any at all, for euro-denominated high-yield (HY) securities compared to the investment-grade category. Therefore, one must consider whether it is worth taking on greater risk for a relatively small premium.
Dollar-Denominated Corporate Bonds
Companies in the region typically issue bonds in euros, so the supply available in dollars is much more limited. The list includes two bonds linked to OTP, a subordinated instrument maturing in 2033 and another in 2035, as well as a Hungarian-issued bond, namely MVM’s note maturing in June 2028.
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