It’s time to refocus on bonds
September 2022 | 3 min read
It’s time to refocus on bonds
Fixed income has always been one of the traditional components of portfolios. In recent times, however, they have not performed particularly well and some investors chose other options. However, it is important to remember that bonds are a very broad and diverse investment universe that may provide potentially appealing opportunities.
If we consider the macroeconomic context, after the end of the “great repricing”, where markets and Central Banks reacted aggressively to the inflationary environment, we are now facing a regime shift. We have entered the “stabilisation” phase, where markets are gradually shifting their attention away from inflation, focusing more on growth prospect. Some curve repricing has already happened and Central Banks have adopted a hawkish stance that has led to a stabilisation of bond yields.
We believe that this could be a good time to bring the focus back on bonds, for four main reasons:
1. As the global growth outlook deteriorates, we believe the risk of stagflation, especially in the Eurozone, has increased. Market attention is now shifting from inflation to growth and, in our view, bonds could serve as a good diversifier* in an economic downturn.
2. It is possible that some Central Banks may face a credibility risk and may have to move towards further rate hikes and reduction of their balance sheets. In light of this, we expect that an agile approach to investing in bonds could be positive.
3. Bonds are also offering more attractive valuations, both in absolute and relative terms versus equities. Valuations have dropped due to the recent fast rise in global rates, coupled with wider credit spreads, which could potentially open up fresh opportunities for investors.
4. In our view, yields have now risen towards more “normal” levels from a historical standpoint. This may lead to opportunities in the governmental and high quality markets, but selection remains important for the latter.
From a core bond perspective, investors may wish to consider high quality assets such as core government bonds, US in particular, and Investment Grade credit for buy and hold purposes. Chinese bonds could be used as a diversifier*, and sustainable bonds may benefit from a green Quantitative Easing. Overall, we believe that a flexible approach is best for getting the most from aggregate bond markets.
Short-term bonds could be another interesting opportunity. In our view, they could offer a positive entry point, because yield levels are appealing again. The first half of 2022 was one of the worst periods for fixed income, and in December 2021, the yield distribution was particularly disappointing, with 41% of the Euro Fixed Income Universe in negative territory1.
The situation has changed rapidly, as roughly 99% of the universe now has a yield above 1%1. Nevertheless, it is important to stay cautious, active and flexible, as the economic outlook is negative for the Eurozone. In our view, as Central Banks are continuing their fight against inflation and tightening their monetary policy, investors may wish to consider solutions to protect their capital in the near term. Considering the return to positive rates, another opportunity may come from money market funds and ultra short-term bond funds.
We believe these two products could benefit in particular from the rate hikes by the Fed and the ECB, with the goal of bringing high levels of liquidity and a positive return to clients in the short term.
*Diversification does not guarantee a profit or protect against a loss
Amundi, as at 27 September 2022
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 27 September 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.
Date of first use: 28 September 2022
DOC ID # 2447833
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