Tapping into fixed income opportunities in uncertain times
Endowus Insights

Leap into prosperity this CNY 💰     Get an $88 head start to growing your wealth.

Leap into prosperity this CNY 💰Get a $88 head start to growing your wealth.

Tapping into fixed income opportunities in uncertain times

Updated
5
Jul 2023
published
6
Jun 2023
Tapping into fixed income opportunities in uncertain times - the image shows a woman meditating in a field. Bonds can help diversify portfolios and smooth out volatility. Find out how leading fund managers are thinking about fixed income amid uncertainty over the rate path.
  • Bonds can help diversify portfolios and smooth out volatility. Amid uncertainty over the path of interest rates, investors may be wondering how to approach fixed income.
  • Read about fund managers’ views on which parts of the fixed income market stand out to them today.
  • Click here to get started with your investing journey with Endowus. To explore best-in-class funds from leading global fund managers, check out the Endowus Fund Smart platform.

Inflation has proven sticky while economic growth slows and a recession looms. 

Against this backdrop, investors continue to face uncertainty over the rate path and growth outlook. Some may be pondering their next moves in terms of how they can approach fixed income amid persistent market volatility.

Here’s why leading fund managers are recommending exposure to fixed income in these times — and their thoughts on where the best opportunities in fixed income are.

<divider><divider>

Opting for a smoother ride

Capital Group, 12 May 2023

“‘As we think about all the uncertainties, it makes sense to remind ourselves of why we buy bonds in the first place,’ [John Queen, fixed income portfolio manager], says. He offers the analogy of heading on a long-distance road trip and opting to drive a sensible sedan over a fast but finicky race car. ‘We own bonds as part of a broader portfolio aiming to basically smooth the ride and lower volatility.’”

“When looking at the fixed income landscape, short-term bonds stand out for their attractive valuations and limited volatility, providing an attractive stepping stone from cash.”

Short-term bond yields hit highest levels in more than a decade this year

Chart: Bloomberg US Government / Credit 1-3 Years ex BBB Index yield (%). Source: Bloomberg, Capital Group. Data as of 4 May 2023.
Source: Bloomberg, Capital Group. Yields shown are yield to worst. Yield to worst is a measure of the lowest possible yield that can be received on a bond that fully operates within the terms of its contract without defaulting. Average yield calculated using data from January 2013 to May 2023. Data as of 4 May 2023.

“To be sure, the market expects rates to fall somewhat but potentially remain at much higher yields than in the recent past. This presents the possibility of not just price appreciation but also compelling income to continue in the near term.”

<divider><divider>

Rethinking bonds

BlackRock, 30 May 2023

“Fixed income finally offers ‘income’ after yields surged globally. This has boosted the allure of bonds after investors were starved for yield for years.”

“In the old playbook, long-term government bonds would be part of the package as they historically have shielded portfolios from recession. Not this time, we think. The negative correlation between stock and bond returns has already flipped, meaning they can both go down at the same time. Why? Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets. If anything, policy rates may stay higher for longer than the market is expecting. Investors also will increasingly ask for more compensation to hold long-term government bonds — or term premium — amid high debt levels, rising supply and higher inflation.”

<divider><divider>

What are global central banks going to do in 2H 2023?

JPMorgan Asset Management, 16 May 2023

“We think most central banks will reach the end of their hiking cycles in the months ahead. The question of whether they will start cutting is a more challenging one.”

“Historically, a pause by the Fed has several investment trends that we can take note of. First, long-duration assets have outperformed short duration. This is partly because investors start to position for an economic slowdown and this could see the long end of the yield curve dip more than the short end.”

“As we have been recommending for much of this year, investment grade corporate debt has outperformed high yield. The prospects of weaker growth could raise default rates and widen credit spreads. This would have a more significant impact on high-yield bond prices than investment grade. … The peaking of policy rates in other parts of the world should also bode well for long-duration fixed income in international government bonds.”

Chart: Cumulative outperformance after final Fed rate hike in a cycle. Total return, T = month in which the last rate hike occurred. The chart shows investment grade over high yield, long duration over short duration, defensive over cyclical, quality over low-quality. Source: Bloomberg, MSCI, Standard & Poor's, J.P. Morgan Asset Management

<divider><divider>

What to do when stuff happens

Franklin Templeton, 18 May 2023

“When looking at high-yield corporate bonds compared to other fixed income opportunities, risk versus reward looks challenged given headwinds facing corporate profits and cash flows. However, a large proportion of the high-yield universe has increased in credit quality. We believe this creates a reasonable case to swap equity exposure with selected high-yield debt that is facing lower default risk than the asset class in general. This provides the protection of the currently elevated shorter-duration yield (averaging roughly 8.6%) while still providing exposure to the upside to any improvement in underlying company fundamentals.” 

<divider><divider>

Building a resilient long-term 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. Explore funds from leading global fund managers on the Endowus Fund Smart platform. 

Read more: A focus on fixed income — curated bond funds (Fund Digest)

<divider><divider>

Investment involves risk. Past performance is not necessarily a guide to future performance or returns. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Rates of exchange may cause the value of investments to go up or down. Individual stock performance does not represent the return of a fund.

Any forward-looking statements, prediction, projection or forecast on the economy, stock market, bond market or economic trends of the markets contained in this material are subject to market influences and contingent upon matters outside the control of Endowus Singapore Pte. Ltd. (“Endowus”) and therefore may not be realised in the future. Further, any opinion or estimate is made on a general basis and subject to change without notice. In presenting the information above, none of Endowus, its affiliates, directors, employees, representatives or agents have given any consideration to, nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Therefore, no representation is made as to the completeness and adequacy of the information to make an informed decision. You should carefully consider (i) whether any investment views and products/ services are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You may also wish to seek financial advice through a financial advisor or the Endowus platform and independent legal, accounting, regulatory or tax advice, as appropriate.

Investment into collective investment schemes: Please refer to respective funds’ prospectuses for details of the funds, their related fees, charges and risk factors. The listing of units of the fund on a stock exchange does not guarantee a liquid market for the units. Before making an investment decision, you are reminded to refer to the relevant prospectus for specific risk considerations.

For Cash Smart Secure, Cash Smart Enhanced, Cash Smart Ultra: It is not a bank deposit and not capital guaranteed, and is subject to investment risks, including the possible loss of the principal amount invested. Investment products are not insured products under the provisions of the Deposit Insurance and Policy Owners Protection Schemes Act 2011 of Singapore and are not eligible for deposit insurance coverage under the Deposit Insurance Scheme. Interest rates are indicative and subject to change at any time.

Product Risk Rating: Please note that any product risk rating (the “PRR”) provided by us is an internal rating assigned based on our product risk assessment model, and is for your reference only. The PRR is subject to change from time to time. The PRR does not take into account your individual circumstances, objectives or needs and should not be regarded as advice or recommendation to purchase, hold or sell any fund or make any other investment decisions. Accordingly, you should not solely rely on the PRR in making your investment decision in the relevant Fund.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Disclaimers
+
More on this Tag
Tapping into fixed income opportunities in uncertain times - the image shows a woman meditating in a field. Bonds can help diversify portfolios and smooth out volatility. Find out how leading fund managers are thinking about fixed income amid uncertainty over the rate path.

Table of Contents