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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.
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
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.
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.
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.
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience.
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 document does not constitute investment advice.
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 outlay. Past performance is no guarantee for future returns.
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).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
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