Bonds are back (Part I)
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Bonds are back (Part I)

May 2023
Jan 2023
racing - bonds are back in favour, amid improved yields

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


More clarity and opportunities in 2023 

UOB Asset Management (27 Dec 2022) 

"A moderation in inflation should open the door for fixed income investments in the first half of 2023. As such, we start the year overweight fixed income. We think this is more of a win-win situation at the start of the year given that current yields are high, and inflation is moderating. If the global economy is able to avoid a significant downturn and we see continued growth, then fixed income should at least be able to offer returns in the form of high yields. If, on the other hand, the global economy slips into recession, then fixed income will benefit from the lower inflation and interest rates that tend to accompany a recession."


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."


Now comes the hard part for central banks

JPMorgan Asset Management (Jan 2023)

“Instead of going full speed with policy tightening to fight inflation, central bankers will need to be more skilled in balancing between prices and growth. In December (2022), government bond yields picked up modestly on the back of their hawkish tone. There is always the risk of errors, and this could mean additional risk of market volatility in the new year. This would imply further inversion of government bond yield curves, and our emphasis for high quality fixed income remains in place.”


Navigating fixed income in 2023

Goldman Sachs Asset Management (Dec 2022)

"Stormy times can lead some investors to step off the racetrack to look for shelter in cash. Others, however, are adjusting to volatile conditions and stepping up — or considering — investments in fixed income. Following the sharp rise in yields in 2022, attractive income and total return potential could potentially be greater than it has been in a decade. Put simply, we believe 2023 is the year for investors to Bring on Bonds."

Higher yields present attractive income and total return potential across fixed income

Chart: fixed income yields across different sectors - Goldman Sachs Asset Management
Source: Bloomberg, Macrobond, Goldman Sachs Asset Management. As of 15 Dec 2022.


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.”


Building a long-term resilient portfolio through Endowus

It is impossible to predict how macro events such as this would play out, or to prepare for any consequent implications on your investments. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.

With digital wealth platform Endowus, you can plan and manage your money — by investing in best-in-class funds and globally diversified, intelligent, low-cost funds and portfolios seamlessly.

Click here to get started with your investing journey with Endowus today.


Read more: Bonds are back (Part II) — which sectors or markets should investors look at?


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