September 29, 2017 / 6:44 AM / a year ago

CMBS, emerging mkt bonds attractive as Fed hikes may slow-BNP Paribas Asset

* U.S. CMBS, EM bonds in hard currencies attractive

* Fed likely to raise rates slower than “dot plots” suggest

By Hideyuki Sano

TOKYO, Sept 29 (Reuters) - The Federal Reserve is likely to raise interest rates at a slower pace than its projections, and ensuing financial stability makes assets such as commercial mortgage-backed securities (CMBS) attractive, the bond investment chief at BNP Paribas Asset Management said.

Dollar-denominated emerging market bonds, which have much higher yields than U.S. Treasuries, are also one of the firm’s favourite assets, said Dominick DeAlto, New York-based chief investment officer of fixed income at the French company, which manages 566 billion euros ($666 billion) of assets.

Global bond prices tumbled after the Fed indicated last week that it was sticking to its plan to raise rates in December.

The Fed’s so-called “dot plots” also showed policy makers expected three more rate increases next year, in addition to the December raise, which would be its third this year.

Fed Chair Janet Yellen fuelled bond selling this week, saying the central bank needed to continue with rate raises despite soft inflation.

Yet BNP Paribas Asset sees only two rate hikes through 2018, DeAlto said, adding markets will remain stable unless the Fed raises rates too hastily.

“To date, the Fed has been quite aggressive in its dot plot. To its credit, the Fed has consistently adjusted its somewhat hawkish forecasts down toward market expectations which to this point have been closer to reality,” DeAlto said.

“As long as the Fed continues to adjust insofar as it does not make a policy error, markets should remain fairly stable.”

In such an environment where bond yields stay relatively low due to subdued inflation, BNP Paribas will increase exposure to riskier, but higher-yielding bonds, rather than low-yielding sovereign bonds, he said.

In particular, BNP Paribas Asset overweights U.S. CMBS, especially those backed by loans to retailers, which have been hit by the increase in online shopping, DeAlto said.

“Because of the fear on the U.S. retail sector, and given near-term impacts of weather, there’s been pretty significant sell-off of CMBS, in particular, the securities that are backed by leases to retail companies and malls. We think this reaction is somewhat overdone.” ($1 = 0.8493 euros) (Reporting by Hideyuki Sano; Editing by Amrutha Gayathri)

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