Massimiliano Castelli Philipp Salman Uta Fehm Tony Appiah

Key messages:

We believe fixed income risk-returns are stabilizing and will improve going forward, so it’s a good time for investors to revisit their allocation to the asset class

  • While significant uncertainty remains around the macroeconomic outlook, a lot of rate hikes globally have happened already or are at least priced in, so negative market reactions should be limited.

Higher yield – a step back towards normality

  • According to Bloomberg only a year ago there were a record amount of bonds (roughly USD 18 trillion) trading with negative yields, but this has largely disappeared with only around USD 2.5 trillion remaining. Most bonds now offer positive yields.
  • While the sharp upward repricing across the curve led to significant negative returns and unrealized losses, current yields have become a lot more attractive in our view.
  • Higher yields mean that investors can generate more income from new bond holdings, which helps to offset potential mark-to-market losses from a further move higher in yields.

More flexibility and some additions in the core fixed income world are recommended

  • To effectively navigate the road ahead and bridge the gap from now until the latter stages of the hiking cycle, we believe that investors need to keep their approach flexible as much as possible.
  • Most bonds in the market are now trading at yields higher than their fixed coupons and bonds are trading at a discount to the redemption values.
  • The positive convexity of bonds should be supportive even if the markets are still volatile.

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