Rates on cash have exceeded bonds, as central banks tackle inflation through monetary tightening.
- Rate hiking cycles across major economies have left cash interest rates higher than bond yields.
- US dollar cash currently earns around 90 basis points more annual income than investing in 10-year Treasuries at a yield of 4.2%.
- In the UK, the 10-year gilt offers a yield of around 4.4% compared to the short-term interest rate of around 5.5%.
But bonds can beat cash as inflation and rates fall.
- We expect slowing growth and inflation to mean a peak in central bank rates and falling bond yields (or rising bond prices).
- CIO expects the UST 10-year yield to fall by about 100bp by end-June 2024 in the base case.
- This moves represents price appreciation of about 10% for high-quality bonds, likely beating cash.
Within bonds, we best like high-quality segments.
- We prefer fixed income over equities in our global strategy.
- We like opportunities in the 5–10 year duration segment in high grade (government), investment grade, and sustainable bonds.
- Actively managed bond strategies may offer convenience, automatic reinvestment, and diversification, while managing dispersion across fixed income segments.
Did you Know ?
- The Federal Reserve hiked rates by 25 basis points in July, setting the fed funds target range at 5.25–5.5%, the highest since 2001.
- Higher bond yields are feeding through into the consumer economy via mortgage rates. In the US, the average 30 year fixed-rate mortgage had risen to 7.31% through the week ending August 18, the highest level since December 2000 according to the US Mortgage Bankers Association.
- The European Central Bank raised policy rates by 25bps in July, lifting the deposit rate to 3.75%.
Investors now have a good opportunity to lock in currently elevated rates for an extended period. In fixed income, we like opportunities in the 5–10-year duration segment; in high grade (government), investment grade (incl. select senior financial debt), and sustainable bonds. Exposure to actively managed income strategies and yield-generating structured investments can help investors take advantage of the breadth of opportunities.
Main contributors - Vincent Heaney, Matthew Carter, Christopher Swann
Original report - Why should I buy bonds now?, 24 August 2023.