MNI Portfolios: T.Rowe Price: Struggling To Find Cheap Bonds

By Yali N'Diaye

     OTTAWA (MNI) - While the broad environment is "moderately constructive for

global bonds," T. Rowe Price Senior Portfolio Manager Ken Orchard said he is

"struggling" to find cheap bonds in developed markets, instead keeping strong

exposure to emerging markets.

     At the current stage of the global growth cycle, emerging market debt

should outperform developed markets, he said, putting an emphasis on local

currency debt in his portfolios, where he still has a "material" position

despite having reduced it at the beginning of the year.

     --COMMODITIES SUPPORT EM

     Higher commodity prices are a key reason, since they tend to support

emerging market currencies, holding down inflation in emerging markets so that

central banks don't need to hike rates so much, argued Orchad, who co-manages

the T. Rowe Price International Bond Fund and the Global Multi-Sector Bond Fund.

     Improving commodity prices, he said, are likely to continue to drive

investments into emerging countries that had been particularly affected by the

commodity crisis.

     Within the emerging market space, he is looking for steep curves where

central banks are cutting rates - such as Brazil and Chili - and countries with

large external surpluses and secular deflationary pressure, many of them in

Asia, such as Thailand, Malaysia and South Korea, where he has an overweight.

     --VALUE IN AUSTRALIA

     Instead, developed markets are underweight, notably the euro zone and

Japan.

     Yet, he still sees opportunities in some developed markets such as

Australia, mostly on the inflation outlook.

     While inflation looks like it is going to pick up, "it's not going to pick

up very much," he expects, in light of subdued labor and housing markets.

     Against this backdrop, the central bank should proceed very carefully with

any tightening.

     --LITTLE FX CONVICTION

     He doesn't have a lot of conviction on the currency side, except that the

U.S. dollar is in the middle of a medium- to longer-term period of weakening.

"That much is clear to us," Orchad said, as the U.S. is in the later stage of

its economic cycle.

     In the short term, however, perhaps a few months, the greenback will likely

continue to go sideways even as it is still a little bit expensive on a

valuation basis, he said.

     But after the Federal Reserve brings its key policy rate to the terminal

level - between 3% and 3.5% - it will likely be one of the first central banks

to stop hiking, he argued. He expects the Fed to hike three or four times this

year.

     In addition, given the fiscal metrics, the dollar needs to go lower in the

medium term.

     So he is focusing on a few emerging market currencies such as the Brazilian

real, the the Indian Rupee or the Czech koruna versus the euro and the dollar.

     Overall, however, he has been keeping the risk low on the currency front.

     --NEUTRAL CANADA

     In Canada, he is "roughly neutral" on both the currency and bond sides.

Canada's been a "tough call" this year, Orchad commented.

     However, issues in the Canadian housing market and high household leverage

have kept the Bank of Canada "very cautious."

     "I don't think they're really sure what they are going to do next," he

said. Rates likely do need to go a bit higher and the loonie to appreciate,

especially if a NAFTA deal is worked out.

     Overall, he prefers to watch Canada from the sideline.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

[TOPICS: M$C$$$,M$U$$$,M$$FI$]