GIBSON SMITH
Janus Capital Group
CIO, Fixed Income & Portfolio Manager


Pressure Building
We remain concerned with the pressures building in the global financial system. Diverging central bank policies and uneven economic growth have created imbalances, and as a result, we expect to see elevated levels of volatility across global fixed income and risk markets. The impact of regulation on dealers’ balance sheets has clearly resulted in diminished liquidity and higher trading costs, new risk factors for many. This environment means that security avoidance —not just security selection—will be of particular importance for fixed income investors going forward. We’ve highlighted these risks in the past and feel they are ever more present today.

Our portfolio positioning has shifted from neutral to more defensive. It is our view that we are in the later stages of the credit cycle, with management teams engaging in bondholder-unfriendly activity, including share repurchases, which are on record pace. In addition, we are seeing a surge in merger and acquisition activity which is largely being financed with debt. Against this backdrop, we have reduced our high-yield and investment-grade corporate credit investments to their lowest levels since the financial crisis, and have increased exposure to high-quality, liquid investments within our core mandates.

We have also reduced exposure to the economically sensitive and commodity based segments of the high-yield market in the interest of avoiding deteriorating fundamentals. From a yield curve and duration perspective, we have taken a very active approach with a focus on protecting capital and minimizing downside risk. Overall, we believe our defensive positioning will be rewarded as volatility increases, thus enabling us to take advantage of new opportunities across different sectors of the market.

Today we remain focused on seeking out the best risk-adjusted returns in the market while also keeping a close eye on capital preservation within our portfolios.

For more information, please visit www.Janus.com/FixedIncomeInsights



DARRELL WATTERS
Janus Capital Group
Portfolio Manager

A Resilient Consumer

Since exiting the financial crisis, two shadows have persistently hung over the U.S. economy: skittish consumers and the deleveraging of corporate and household balance sheets. Both are evolving. Recent data suggest that tailwinds are building that could lift consumption back toward its pre-crisis role as engine for the broader economy. Corporations—taking advantage of perhaps the final stages of exceptionally low interest rates—have begun to dial up leverage ratios. In our view, neither of these developments is priced into fixed income markets. This complacency has significant implications for bond investors. Throw in the possibility of upside surprises to global growth, namely in Europe, along with worryingly low market liquidity, and it becomes clear that “priced to perfection” can be more aptly described as “perilously positioned.”

The argument for a near-term acceleration in personal consumption due to energy savings has become more compelling. Crude oil prices have remained low enough to possibly convince consumers that a return to $100 per barrel is unlikely in the foreseeable future. This alone may jostle a few more dollars toward retail spending as households reset their budgets to account for lower energy outlays.

More important has been continued improvements in employment. Over the past year, monthly gains in nonfarm payrolls have averaged nearly 243,000. At 5.3%, the unemployment rate, some would argue, is within proximity of full employment, meaning that workers will be able to command higher wages as competition for labor increases. Recent gains in year-over-year wages, hovering just above 2%, lend credence to this scenario. While retail sales data remains choppy, improvement in personal consumption can be seen in gross domestic product (GDP) data, where it has been by far the largest contributor to growth in four of the five quarters following the economy’s surprise contraction in the first quarter of 2014.

For more information, please visit www.Janus.com/FixedIncomeInsights



CHRIS DIAZ, CFA
Janus Capital Group
Head Of Global Rates & Portfolio Manager

Global Outlook

We believe that recent signs of strength in eurozone economies are real and may even surprise to the upside. Authorities, including the European Central Bank (ECB), in our view, have made tough—but correct—calls on economic reforms and their stance with Greece. Many interpreted the spring’s retreat of German government debt as a sign that nascent regional growth may not render it necessary for the ECB to implement its quantitative easing (QE) program in its entirety. Instead, we see the dramatic fall in bond prices as evidence of diminished liquidity that is hindering fixed income markets. Risks of policy backsliding also remain. There is still much work to be done, among both peripheral and core economies, with regard to structural reform and creating a business-friendly and growth-oriented environment. Inflation remains worryingly low. The ECB’s commitment to extraordinary policy should help. It will also keep pressure on the euro, which bodes well for the region’s exporters.

Several EM currencies have been provided with temporary respite now that last year’s torrid strengthening of the U.S. dollar has abated. But with slowing growth in China and the recent devaluation of the renminbi, downward pressure—especially in Asia—has returned. Yet, compared to the crisis periods of the late 1990s, EM balance sheets are more robust and less vulnerable to a rising dollar. Also, should any additional declines be orderly, the resetting of these currencies at levels markedly lower than in 2014 should be favorable to exporters. Commodities powerhouses Russia and Brazil are on weak footing due, in part, to a low price environment for their key exports, and also country-specific issues, including economic sanctions on the former and corruption probes in the latter. Lower energy prices, on the other hand, will continue to lend support to commodities importers including India and Turkey.

For more information, please visit www.Janus.com/FixedIncomeInsights

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