A group of global fixed-income investment managers at Paris-based Amundi Asset Management said the tide is turning for this asset class, and there are at least four reasons why financial advisors should be revisiting it.

“Six months ago, one year ago, I never could have imagined having this conference. If you remember, back then we were talking about the T-note, and basically it was very difficult to find any kind of value in fixed income. Times have changed. Quickly, actually,” Vincent Mortier, the company's group chief investment officer, said yesterday at an online press conference discussing fixed income’s potential renaissance. “And now we’ve assessed collectively that value has been restored in this space and it is time to reconsider investment into fixed income.”

Although the event had been titled “3 Good Reasons To Look At Bonds,” Mortier began with bumping that to four, recognizing the current inflationary environment: positive yields, the diversification that comes with bonds once again being negatively correlated to equities, a safe “insurance play” against market shocks and the recession protection found through capital appreciation.

“Bonds are back,” he said. “The 60/40 is not dead.”

Mortier was joined by three Amundi experts: Ken Taubes, chief investment officer in the U.S.; Amaury d’Orsay, head of fixed income in Europe, and Yerlan Syzdykoc, head of emerging markets. Each presented the reasons why they believed they are witnessing a bond comeback, and their remarks were made ahead of the latest inflation report showing higher than expected price increases, released less than two hours later.

According to Taubes, consumers have been feeling good about the economy compared to where they were in the spring, when the first punches of inflation were being felt. Gas prices have dropped and employment also has remained robust.

“So overall that’s what you’re seeing in the markets. The markets have now discounted a soft landing, with the Fed finishing its rate hikes this year or early next year, and then turning toward rate cuts,” he said. “So the market is discounting the Fed threading the needle, even if history hasn’t been on that side of the equation, that being a very low probability event historically.”

In addition, he added, he believes that long-term interest rates are probably near their peak, and that’s one reason why Amundi has turned a little more positive on long durations in the U.S. “Even if the Fed continues to raise short-term rates, as the economy slows and as financial conditions tighten to bring inflation back into target, bonds will play a pivotal role in a slower economy.”

Looking at the corporate credit market, he said neither the investment-grade nor the high-yield market are discounting a recession. Both these markets, he continued, are suggesting things are OK. High yield spreads, if anything, are below average now after the summer rally. High-yield spreads are about 450 basis points over Treasurys, and investment grade securities are just under 150 basis points above Treasurys.

“These are much lower spreads than there were in the early summer, late spring, even if they are somewhat wider than where they were at the end of last year,” he said. “High-yield returns are just under 8%, and investment-grade bonds are just under 5%. But be aware if the Fed needs to tighten more than the market currently thinks; these spreads do not represent any serious pricing of a slowdown of the U.S. economy.”

D’Orsay added his own data from Europe to this rosier picture, starting with a repricing of the yield curve. At the end of 2021, 41% of the European fixed-income universe had negative yields, he said. Now, seven months later, there are no more negative yields. In addition, less than 10% of the universe that was above 1% at the end of ’21, and now 98% of the fixed income universe, is above 1%.

“It’s massive repricing that has not been seen in the last 25 years, neither in terms of magnitude, nor in terms of speed,” he said. “There is an alternative to equities to be found in fixed income, and it’s time to diversify again.”

Aside from the yield curve, real return rates have stabilized, he said, to the point where there are 200 basis points between the first quarter of this year and the beginning of the third quarter. “We’re back to levels we haven’t seen for the last 10 years.”

That decade-in-the-making reset can also be seen when looking at the cost of bonds versus equities. “Bonds are looking cheaper than equity than they used to, as the spread between dividend rates and interest has narrowed over the last three years,” he said. “Here, too, we are back to the levels that we had 10 years ago.”

Given ongoing volatility and continued slow growth or even recession, Amundi is favoring the safest assets of the fixed-income world—sovereign government bonds and investment grade bonds, and the inflation-protected bond market, but no big high-yield plays, D’Orsay said. In terms of duration, he said he favors five- and 10-year maturities.

“The good entry point is to invest when a bond is at least above 140 [basis points] in terms of yield on the 10-year maturities,” he added, giving a clue to good timing under current conditions.

Syzdykoc said emerging markets still represent value, especially with regard to China, and they are countercyclical to the slowdowns in Europe and Eastern Europe.

“Not so much a diversifier, emerging markets are all about a carry play and there are interesting opportunities at it stands now,” Syzdykoc said.

While there have been some downsides in the strength of the dollar and the cost of inflation for food and fuel, Syzdykoc said that value in the emerging markets worlds is more on the high-yield side of the bond market, not investment grade. Still, there are limits, and he said had won’t drop below BBs.

“Of course, the different pockets of the emerging world offer different values,” he said. “But the opportunity for carry is significant in the stable core markets.”

Mortier summarized that in general it’s high quality credit that will pave the way for bonds regaining their place in a portfolio’s allocation picture.

“If you’re able to stomach some market volatility and able to commit to four or five years, now is a very attractive time to re-enter the market,” he said.