Buy quality bonds
The rise in high-quality bond yields over recent months is an investment opportunity ahead of rate cuts, moderating growth, and geopolitical risks.
We keep a preference for quality bonds. Robust economic growth and elevated inflation have driven bond yields higher in recent months, improving potential returns for investors in quality fixed income. Investors can benefit from attractive yields and potential capital gains if yields fall (as we expect) and diversify portfolios against equity market risks. Beyond individual bonds, active and diversified fixed income exposure can provide investors with a convenient way to realize the full return potential of the asset class while managing global interest rate, credit, and concentration risks.
High grade (government) and investment grade bonds
High grade (government) and investment grade bonds
High-quality bonds are still a preferred asset class. Yields are still close to decade-highs, and we expect falling inflation to allow major central banks to cut rates two to three times later this year and lead government bond yields to fall from current levels.
However, tight spreads on investment grade (IG) corporate bonds call for a selective approach to the asset class: US IG spreads based on ICE BofA data at the end of February stood at just the 8th percentile when measured since the beginning of 2010. Our focus is on bonds of quality issuers with maturities in the 1–10-year bracket, as we believe this middle part of the yield curve offers the best combination of high yields, stability, and sensitivity to falling interest rate expectations. For US municipal bonds, our preferred duration is around five years.
Sustainable bonds
Sustainable bonds
Sustainable fixed income offers an appealing alternative to high-quality bonds. These include bonds issued by supranational agencies and governments, and IG bonds from corporate issuers with mid-to-high credit ratings. We expect a diversified exposure to sustainable bonds to generate returns comparable to a mix of government and IG corporate bonds, while also contributing to positive sustainability goals.
Active and diversified bond exposure
Active and diversified bond exposure
Beyond individual bonds, investors could also consider exposure to actively managed fixed income strategies to improve diversification, gain the convenience of automatic reinvestment, and take advantage of the breadth of opportunity in the asset class.
Active approaches may offer higher potential yields thanks to risk-controlled exposure to higher-yielding parts of the fixed income market (such as US high yield, emerging market debt, and securitized credit), which may be harder for individual investors to access or manage. Active approaches may also be able to use derivatives to manage rate and credit risks in ways investors could not on their own. Investors may also be able to use well-diversified fixed income portfolios as collateral for borrowing.
