Fixed income
Are bonds offering value once again?
5 min read 16 Feb 23
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Bond markets experienced one of their sharpest sell-offs on record in 2022, as concerns over persistently high inflation forced central banks to take a far more aggressive monetary policy stance, with the Federal Reserve pushing through a series of interest rate hikes. There were few places to hide in fixed income, as government bond yields climbed to their highest levels in over a decade, while credit valuations also came under severe pressure.
However, given the scale of these moves we believe fixed income investors go into 2023 on a much better starting point and we see compelling value across many parts of the asset class. For the first time in many years, we believe investors are being well paid to take both credit and interest rate risk. This current window of opportunity is perhaps best illustrated by the fact that corporate bond yields are today all in positive territory – the era of negatively yielding corporate debt is finally at an end.
We would also expect inflation to gradually ease throughout 2023, helped by lower commodity prices, slowing growth and base effects. After a brutal year for fixed income, we think this will allow central banks to slow their pace of rate hikes, which could provide a very welcome tailwind for bond markets.
We think there is especially attractive value to be found in credit, where we believe corporate fundamentals remain robust and expect defaults to remain low. While further volatility is likely in the short term, from a long-term perspective we think credit provides compelling risk/return dynamics.
End of an era – corporate bond yields are all in positive territory
Past performance is not a guide to future performance
Bloomberg aggregate negative yielding debt in USD trillions.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.