Bonds are back
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Bonds are back

Updated
28 Apr
2023
published
2 Feb
2023

Market commentators are seeing a strong case for investing in bonds, reflecting a yield reset in 2022 and as an economic downturn is looking likely this year, notes PIMCO. 

Here is a list of commentaries from fund managers on why they think bonds are back.

Strained Markets, Strong Bonds 

PIMCO (11 Jan 2023)

"Bonds are alluring again, with improved yields and lower expected volatility on the highest-quality assets at the centre of our concentric circles investment framework."

"We continue to see a strong case for investing in bonds, after yields reset higher in 2022 and with an economic downturn looking likely in 2023. Fixed income markets today can offer broad opportunities to build resilient portfolios with the potential for both attractive returns and mitigation against downside risks."

"While our baseline is a modest recession and moderating inflation, our Investment Committee discussions focused on the wide range of plausible scenarios and asset price returns in those scenarios. For example, corporate credit could perform well in a very mild recession. Although we expect disinflation, US Treasury Inflation-Protected Securities (TIPS) could perform well given uncertainty over where core inflation settles versus current pricing.”

Diagram of PIMCO’s investment concept of concentric circles, which places the least risky, most liquid asset classes at the centre, including overnight repo rates, commercial paper, and ultra-short and short-term bonds, then expanding to somewhat riskier assets including longer-term sovereign bonds, mortgage-backed securities, and investment-grade corporates, and populating the outer rings with less liquid, higher-risk assets, such as high-yield corporates, emerging market investments, equities, and real estate
Source: PIMCO

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The markets vs. the Fed 

Franklin Templeton (19 Dec 2022)

“Overall, we think that as we enter 2023 volatility will remain the most formidable challenge for fixed income investors, as markets will keep second-guessing the Fed against a background of mixed activity and inflation data. The fixed income universe already presents some very attractive investment opportunities, and more will emerge in the coming months. However, given the volatility and the challenging and uncertain macro environment, an active approach to security selection is at the moment indispensable, in our view.”

“Despite the high volatility … and the challenging macro environment with elevated inflation and a looming recession, we are quite constructive on the fixed income outlook. Higher interest rates imply that fixed income can now finally deliver income again, with attractive risk-return profiles in some segments of the asset class, particularly on short duration. … We believe benchmark yields have more room to rise, as we expect fed funds to peak in a 5.00% to 5.50% range, but as they near this peak, and technical conditions stabilise, more investment opportunities will arise."

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Zooming in on fixed income as we head into 2023 

BlackRock (29 Dec 2022)

“If inflation indeed moderates from here, it is likely that interest rate volatility moderates alongside it, since it is the uncertainty around the peak in inflation that has driven the uncertainty around the peak in interest rates. Central banks may not necessarily lower interest rates; but simply holding them stable for a while would already be a dramatic departure from the pattern of 2022. This leaves fixed income yields in a unique position — risky spreads have responded negatively to a rise in rate volatility, in a rare moment when rate volatility has risen because rates themselves have exploded higher.

This may set up for a unique, “double-barrelled” return environment sometime in the future should rate volatility normalise. Risky asset returns may be boosted by both the excess return and rate return component — and at the very least by being able to clip a stable (and high) coupon.”

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Emerging-market local currency yields offer protection in volatile conditions

Capital Group (30 Nov 2022)

“The global backdrop remains a key headwind for EM debt, and volatility is likely to persist in 2023. That said, valuations have markedly improved and EM debt now seems to be pricing in known risks and, as such, could offer attractive return potential for research-based, long-term investors. We see opportunities in select higher yielding hard currency sovereign and corporate bonds, as well as in certain local currency countries that have been proactive in their monetary policy responses.”

Real yields in emerging markets have offered a 2% to 4% pick up over the US
Source: Capital Group, Bloomberg

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