May 15, 2024
Fixed income
With yields at levels last seen before the global financial crisis, we believe a golden age lies ahead for fixed income investors. Income-based returns are back, and investors no longer need to risk equity-type drawdowns or sacrifice liquidity to achieve their investment objectives. in our view, it is an opportune time to increase fixed income allocations.
- Yield is back and we believe it’s here to stay: The era of low yields that existed since the global financial crisis has come to an end, and bond yields have returned to precrisis levels. We believe central banks will be operating in higher policy ranges in the years ahead and this should keep bond yields elevated.
- We believe that long-term return objectives are achievable with fixed income alone: Many segments of fixed income markets now offer yields comparable to or even in excess of the long-term returns of the MSCI World Index. This provides an opportunity to lock in long-term equity type returns through fixed income markets.
– Volatility can provide opportunities for active investors to further enhance returns
– There are ways to overcome liquidity concerns in higher yielding segments of fixed income markets - Reliable returns, lower drawdown risk and diversification benefits: The largely income based returns delivered in fixed income markets are typically less volatile and more predictable. Bonds are contractual assets which provide payments on specified dates and the income they generate acts as a natural buffer against capital losses.
– Volatility and drawdown risks have historically been much lower in fixed income than equities
– High quality fixed income can be a risk diversifier in severe downturns - Corporates are well positioned at this stage in the cycle: Corporate balance sheets look healthy, as do debt profiles. Corporate treasurers used the low level of interest rates during the pandemic to lock in advantageous funding levels for an extended period. This has insulated many corporates from the rise in rates, providing ample time to plan for higher funding costs
- A lopsided equity world makes a fixed income allocation even more compelling: Although the ascent of the US megacaps has reflected a period of exceptional earnings growth, their dominance means many equity investors are now more concentrated than they may realise.
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