Fixed income investors should be more worried about the upcoming European elections than any potential interest rate hikes from the US Federal Reserve, according to Bob Michele, global head of fixed income at JPMorgan Asset Management.
A number of industry commentators believe the Fed is likely to raise rates later this month, with chair Janet Yellen hinting as much last Friday.
This was made even more probable this week following the release of a strong jobs report, with ADP employment (private sector jobs created) rising from 298,000 in February from 261,000 the month before.
ADP private-sector jobs growth in thousands
Source: Marketwatch.com, Automatic Data Processing Inc. via FRED
“I think until last week most fixed income investors were worried about the Fed; was March realistic? Was it not? I think the Fed answered that question and the market now fully expects them to go in March. The market has priced that in and all is good,” Michele said.
As such, he says investors should focus their attention on Europe, with Dutch elections expected to take place this month before the first round of French elections – which he calls key – in April.
“To me the biggest question out there is the elections coming up in Europe – especially the French elections,” the fixed income fund manager said.
“Although the spread particularly on the front end of Germany to France has widened out a bit I think the market is still somewhat complacent.”
He says this is particularly worrying given the level of inflows into French bonds as well as peripheral European markets from areas such as Asia and Japan over the last few years.
Investors hoping for convergence from the European Central Bank’s bond buying program and higher yields could have a detrimental effect on the fixed income outlooks for Europe. 
Michele says this is beginning to unwind, thanks to the two fairly surprising votes seen last year - first on Brexit then on Trump being elected.
While the sector has already started to experience outflows, he expects these to accelerate if Marine La Pen leads in the first round of the general election.
This is the largest concern for fixed income investors, he says, but this year looks set to be more challenging than just this, with the Dutch and German elections also potentially causing a surprise.
“Right now because of the uncertainty in Europe around some of the elections I would rather wait until we get into the first round of French voting before we took risk in those or increase the risk that we have around benchmarks,” he said.
Indeed, rather than being perturbed by the Fed, Michele says his best ideas are in the US and emerging markets as they have both already been through tough periods over the last year.
“Trump and his administration remain very pro-growth and it seems like congress is working with them, so we continue to like credit in the US market whether its investment grade or high yield,” he said.
“We like some of the emerging markets which seem to have gone through some of their currency adjustment and should benefit from growth and inflation.”
He says president Trump and Congress are aiming at three things, the first of which being a cut to taxes, which the manager says will “immediately flow right to a company’s bottom line”.
Second is deregulation “particularly for some industries like the banking industry where deregulation could encourage them to extend credit more aggressively,” he continues.
“The third then is the fiscal spend which adds what the world needs most which is aggregate final demand.
“If you get aggregate final demand and consumption increased through the fiscal spend at a time when companies experience some deregulation and their taxes are cut, I think that is stimulative and highly profitable for companies.
“A lot of that will spill over into the global supply chain which is why we like the emerging markets.”
Turning to the emerging markets, he says many countries immediately impacted by the Trump election have gone through significant currency shifts that should set them up for a recovery in the future.
“If we think of where currencies have gone through a large adjustment, one obviously is Mexico,” he said.
“Of course there is still a lot of rhetoric coming out of the administration about Mexico and a lot of issues there but the reality is the currency has cheapened up quite a bit and the bank of Mexico is stepping in with a policy response to support the Peso and we like the 10-year local debt in that market.
“If we look at Brazil, again the currency has gone through an adjustment, commodity prices have stabilised and are on the way up, so the ability to buy 10-year local market debt at around 10.5 per cent makes some sense to us.
Performance of Brazilian Real vs US Dollar over 5yrs
Source: FE Analytics
“So those are the kinds of markets that we are looking at and buying and I think what investors had forgotten is that these currencies don’t just continue to sell off in one direction endlessly.
“At some point in time there will be a policy response to the move and that will help to stabilise things and I think we have reached that point.”