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Asset Management / Wealth Management
Fixed income presents opportunity not seen in 20 years
Bonds can offer stable income without a lot of risk if investors take a two- to three-year view on their portfolio
Bayani S Cruz 25 Jun 2024

In the current market environment, the fixed income asset class can offer stable income without a lot of risk, an opportunity that has not presented itself in 20 years.

“That’s the big shift that we talk about as we go forward. The reality is, if you look back the last 20 years, it has been a long time since we have really had the opportunity to build income in this world without taking a lot of risk,” says Neeraj Seth, chief investment officer and head of Asia-Pacific fundamental fixed income at BlackRock.

At current levels of interest rates, Seth explains, investors can benefit from lower policy rates in the future if they take a two- to three-year view on their investment portfolio.

“If you have a portfolio of fixed income that’s yielding between 6.5% and 7.0%, in a three-year horizon, the difference between the performance of the two can be as high as 10%. And I think that is sometimes missing in terms of the thought process [of investors],” Seth says.

“I think we have entered the golden age of fixed income, and this is since after 2007 (global financial crisis). I can see where the nominal yields are in this world, which given the policy path going forward is extremely attractive.”

This is based on expectations that the US Federal Reserve will cut interest rates only once this year, instead of multiple times as it had previously indicated. Rising inflation has made it difficult for multiple rate cuts.

The rate cut is expected to take place in December, unless there is a significant drop in US inflation in Q3, which may push the Fed to cut rates in September, but many experts do not expect this to happen.

Good for credit spreads

In general, an environment of near-trend growth and near-target inflation is a good one for credit spreads, according to PGIM in its weekly fixed income update.

With the second half of 2024 in sight, PGIM expects the prevailing macroeconomic wind maybe one of “moderation” for the United States, the euro area, and China in the coming 12 months.

In the US, PGIM expects inflation to slow to about 2.2% by the end of Q2 2025, with a 2.0% GDP growth supported by solid consumer consumption and an improved labour market.

In the euro area, PGIM expects economic momentum building towards a potential 1.5% GDP and inflation easing to 2.0% in the next 12 months.

In China, PGIM assumes that the stimulus delivered in H2 2023 and H1 2024 would help offset the drag from the property sector, with a consensus GDP growth expectation of 4.5-5.5% and inflation of 1.0-1.5%.

Based on these expectations, PGIM anticipates developed market fixed income to generate small positive excess returns over cash for US treasuries and modestly higher ones for German bunds.

The outlook for spreads within emerging market (EM) debt remains a balancing act and the prospects for hard currency EM debt look appealing but there are headwinds that require deliberate positioning, particularly geopolitical developments, according to PGIM.

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