Volatility related to political and economic uncertainty in Europe may create buying opportunities in US corporate credit and emerging markets debt, according to the May Bond Market Observations from Standish Mellon Asset Management, the fixed income specialist for BNY Mellon.
The global recovery, now in its third year, is expected to continue despite the issues in Europe according to the report. The risks of a Greek departure from the euro may have increased, but European policy makers will likely take action to prevent this from occurring in the short term, Standish said.
"The good news is the global economy probably is better positioned for a Greek exit from the euro than it has been in at any time in the last two years," said Thomas D. Higgins, global macro strategist for Standish and the author of the report. "But, we expect the political and economic uncertainty in Europe to lead to further volatility in the financial markets, particularly in the summer months when liquidity dries up."
Standish remains cautious on European corporate debt and peripheral European government debt. The election of anti-austerity political parties in Greece raises the probability of the country leaving the euro, according to the report. However, the reintroduction of a separate Greek currency is likely to lead to immediate devaluation, debt default, capital flight and a collapse of the banking system, all of which may lead to worsening conditions.
Standish also is concerned about possible contagion of Greece's problems to other peripheral European countries. In contrast, economic fundamentals in the US and emerging markets support current valuations for US credit and emerging market debt, the report said.
"Overall, we expect the economic divergence between Europe and the rest of the global economy to continue," Higgins said. "During periods of high uncertainty that could arise because of eurozone issues, we believe there could be buying opportunities for US corporate credit and emerging market sovereign bonds, which appear to have attractive fundamentals."