With interest rates having risen sharply from their historic lows, selected fixed income segments look attractive again.
Higher interest rates (and yields)
Bond yields have returned to more normal levels now that central banks are hiking interest rates to curtail high and sticky inflation. And while recent events such as banking turmoil in the US and Europe could slow the pace of their rate-rising efforts, we think they are unlikely to stop anytime soon.
On the contrary, we believe the US Federal Reserve is likely to tighten policy further at its May meeting, and not cut rates before late 2023 at the earliest. In Europe, where core inflation pressures have shown little sign of slowing, investors are pricing in a more hawkish path by the European Central Bank.
At prevailing yield levels, bonds could offer an attractive balance between income and more traditional benefits such as capital preservation. Market dislocations are also creating opportunities in certain segments.
Money markets and short duration
We think inflation-linked bonds are likely to outperform nominal government bonds if inflation continues to exceed expectations. There is, however, short-term risk through exposure to real rates.
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- Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This material does not constitute investment advice.
- Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).