BNP AM

The sustainable investor for a changing world

Bonds are back

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.

Investment opportunities

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.

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Money markets and short duration

Yields on money market and short duration funds are now positive, and we believe they represent a compelling investment opportunity given current market volatility. We favour high-quality and highly liquid assets.

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Inflation-linked bonds

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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Developed credit markets

Developed market corporate bonds could offer attractive risk-adjusted returns versus government bonds. We expect only a small increase in defaults in the high-yield segment in 2023.

Developed market corporate bonds could offer attractive risk-adjusted returns versus government bonds. We expect only a small increase in defaults in the high-yield segment in 2023.  

    Past performance or achievement is not indicative of current or future performance. Performances is calculated net of fees unless otherwise stated.
    • 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.
     
    Investments are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. There is no guarantee that the performance objective will be achieved.
    • 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).
    Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.