Corporate defaults are a growing risk for next year, although central bank stimulus and a Covid-19 vaccine will provide support, Russell Investments' CIO for fixed income and EMEA said on Monday.
"You've got the vaccine news, you've got the stimulus in the background, you've got low interest rates," Gerard Fitzpatrick told the Reuters Global Investment Outlook Summit.
"On the flip side, there is definitely a rising risk relating to default risk. We're not out of the woods relating to Covid. It's clearly having an impact on the economy and some sectors."
The coronavirus shock will more than double company default rates across the United States and Europe over the next 9 months, ratings agency S&P Global said last month, predicting US corporate default rates at 12.5%. Europe's rate would surge to 8.5% from 3.8%, it said.
Fitzpatrick, who helps to manage almost $300 billion in assets, said he had reduced some of the credit overweight he had taken on in March.
"The delta of the stimulus being behind us, and the default risk being ahead, means now's the time to be a bit more conservative," he said.
Fitzpatrick expects central bank policy support to cap any bond sell-off, with 10-year US government borrowing costs unlikely to rise more than 50 basis points, from the current 0.86%.
"A 50 bps increase from here would take us to 1.30-1.40%, if it (any selling) were to escalate further, you would get more of a repeat of the market volatility we got with the taper tantrum one, which wasn't good, nobody wants that," Fitzpatrick said, referring to sell-offs triggered by hints of stimulus pullback.
He reckons US yields could fall further and is overweight Treasuries over German Bunds, betting on a compression in the yield gap.
Inflation is also on his list of risks to watch next year.
"I think it's a low risk, but the severity would be high, if it did happen," Fitzpatrick said. "And the low risk, I think, is because of that control from central banks, and you've got to put your money there for or against central banks."