Yields, though off their peak, still look attractive, and we see the potential for capital gains in the event of a deeper economic slowdown. As a result, we think it's time to increase exposure to bonds and investors holding excess cash should consider opportunities to lock in today's yields.
Yields have fallen from their peak, amid worries that problems in the banking sector will slow growth.
- The yield on the 2-year US Treasury is down from a peak of 5.06%in early March, to 3.77% as of 27 March.
- The yield on the 10-year US Treasury has fallen from a 2023 high of 4.07% in early March to 3.37%.
- The yield on the 10-year German Bund is also down, from 2.75% in early March to 2.12% at present.
But despite the recent fall in yields, we have become more positive on bonds.
- The recent concerns over the banking sector have increased the changes that central bank hiking cycles will end sooner.
- In its latest statement the Fed replace language about “ongoing increases” likely being appropriate with a milder comment that “some additional policy firming may be appropriate.” The ECB said it would be “data dependent.”
- Even after recent declines, we think yields remain attractive, especially given the potential for capital gains in the event of a deeper economic slowdown.
So we are most preferred on bonds, with a preference for high quality.
- We think it's time to increase exposure to bonds. High grade and investment grade bonds still provide some protection against recession risks, despite the recent moderation in yields.
- 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 27 March, markets are pricing a peak in US interest rates of around 4.86% by May, versus the current target range of 4.75–5%.
- Month-over-month, US core CPI inflation, excluding food and energy, rose at the fastest pace in five months, accelerating to 0.5% in February from 0.4% in January. Year-over-year, headline inflation moderated to 6% from 6.4%—and down from a June peak of 9.1%—but the core measure only eased to 5.5% from 5.6%.
- Core Eurozone inflation for February rose to 5.6%, above the 5.3% forecast and the fastest rate since the formation of the single currency in 1999.
With recent events suggesting that policy rates may peak earlier than anticipated, we think investors should act to lock in attractive yields in fixed income. High grade and investment grade bonds still look attractive as defensive assets. We also like sustainable and emerging market bonds.
Main contributors - Christopher Swann, Vincent Heaney
Content is a product of the Chief Investment Office (CIO).
Original report - Where are the opportunities in fixed income?, 29 March 2023.