Fixed income yields have been retreating in 2023 after climbing last year.
- The yield on 10-year US Treasuries fell 54 basis points year-to-date up to 19 January.
- The improved performance followed a negative total return of 14.5% last year.
- Fixed income returns have been broadly positive in 2023, including 4.5% for USD investment grade and 3.9% on EM sovereigns.
But despite this move, we still see yields as attractive in various parts of the fixed income market.
- All-in yields are still attractive in our view, particularly relative to opportunities in other asset classes.
- Investor demand for fixed income exposure has increased.
- Spreads on emerging market bonds should continue to benefit from China's reopening along with further support for the nation's property sector.
So we are positive on high grade and investment grade bonds, along with EM sovereigns.
- High grade and investment grade bonds still provide some protection against recession risks, despite the recent moderation in yields. In contrast, HY spreads look vulnerable given slowing growth and earnings.
- We are also most preferred on emerging market bonds, as investors position for the inflection point in global growth in 2023.
Did you know?
- As of 16 January, markets are pricing a peak in US interest rates of around 4.9% by June 2023, versus the current target range between 4.25% and 4.5%.
- US annual inflation fell to 6.5% in December, its lowest level in more than a year. That was the sixth consecutive monthly decline, and down from a peak of 9.1%. The core measure, excluding food and energy prices, slowed to 5.7% in December from 6% in the prior month.
- Data showed that Eurozone consumer price inflation slowed to 9.2% year-over-year in December, from 10.1% in November and a record 10.6% in October.
High grade and investment grade bonds still look attractive as defensive assets, following the sharp rise in yields in 2022. We are most preferred on emerging market bonds. We see the performance of this segment being driven by carry and upside on special situations in the distressed space. This includes sovereigns willing and able to work with the International Monetary Fund or other international lenders, or where we see upside to potential restructuring scenarios.
Main contributors - Christopher Swann, Vincent Heaney
Content is a product of the Chief Investment Office (CIO).
Original report - Where is there opportunity in fixed income, 24 January 2023.