Tapping into fixed income opportunities in uncertain times

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.

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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

“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.”

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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.”

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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.”

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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.” 

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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)

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