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.”