• Fixed income investing in the recessionary environment at its best in decades
• Rising bond yields are making fixed income investments attractive again
• Reduce portfolio risks in the volatile stock market with bond investments
Fears of recession, high inflation and rising interest rates caused the stock markets to collapse in 2022. Government or corporate bonds can offer investors a way out and score points with increased yields.
The customers of the major Swiss bank UBS are probably restructuring their securities accounts: According to the Handelsblatt, exposure to bonds is increasing to the detriment of equities – but alternative asset classes are still very important to wealthy UBS customers. At the same time, commitment to real estate is falling. “High-quality bonds have become much more popular with investors. Further interest rate increases are already largely priced into the prices, so that 2023 will be a good year for government bonds and corporate bonds with good credit ratings. High-yield bonds should be avoided for the time being, as there are too many Risks,” advised UBS’ chief investment strategist in Germany, Maximilian Kunkel, to investors in the Handelsblatt.
Global recession 2023: bond rally continues
Asset manager Vanguard sees very clear signs of a recession in its outlook for the coming year. Expected global macro and financial market conditions are similar to those that have signaled global recessions in the past. Concerns about energy supply and demand, slowing capital flows, declining trade volumes and falling per capita production per person mean that the global economy is likely to will enter a recession after next year,” it said. In its baseline scenario, the asset manager sees a global recession in 2023, which is caused by the restrictive monetary policy triggered by central banks as they attempted to curb inflation.
Sara Devereux, head of Vanguard Fixed Income Group, which has $1.9 trillion in fixed income assets under management, sees an opportunity in bonds as central banks maintain tight monetary policies into 2023 and the US Federal Reserve’s slowing rate hikes ailing corporate bonds. “The total returns we’re seeing are the best they’ve been in a decade. Those returns are an excellent cushion for any price swings we might see,” she told Bloomberg. The recent bond rally could continue, offering an opportunity to reduce credit management and leverage mortgage bond valuations to buy select bonds. Picking is crucial for success: Avoiding “losers” is currently at least as important as investing in “winners”.
Specifically: According to Sara Devereux, the asset manager Vanguard is investing more in bonds from mortgage agencies and in corporate bonds from less cyclical sectors with higher credit ratings, high cash flows and attractive balance sheets due to the currently attractive spreads. On the other hand, first-class bonds and bonds with above-average performance in 2022, such as loans and emerging market bonds, will be unattractive for Vanguard.
Investing in the bear market: reduce portfolio risks
The experts surveyed by yahoo!finance as part of the series “What to do in a bear market” also see attractive investment opportunities in bonds.
Gargi Chaudhuri agrees that rising bond yields would make fixed-income investments attractive again. Speaking to yahoo!finance, BlackRock America’s chief iShares investment strategist said, “There is tremendous potential in the fixed income markets that we have not seen in a decade and a half.”
The right time to reduce portfolio risks in the volatile stock market with bond investments has probably come, agrees the head of US Bank Wealth Management capital market research Bill Merz. “Inflation remains problematic and will keep central bank policy on a hawkish path. Liquidity signals are at levels that typically precede weaker equity performance and better bond performance,” he said. The CEO of Infrastructure Capital Management in New York, Jay Hatfield, draws a similar scenario.
Bill Merz sees good investment opportunities in high-quality, low-risk bonds – municipal bonds with medium to longer maturities are particularly attractive to him. But the expert also sees good profit prospects on the real estate market: “We currently see perhaps the most unique opportunity in non-agency mortgage bonds, a rare example of a higher-yielding category that we continue to view constructively”. He added that this investment strategy may seem counterintuitive due to falling property prices: “However, most non-agency mortgage bonds (particularly those issued before 2022) would be well protected even if property prices fell sharply, the excess return over government bonds lies in near crisis levels and low new supply of non-agency mortgage bonds should give prices a tailwind.”
Jay Hatfield, on the other hand, favors preferred stocks because they typically trade well below par and are issued by companies and institutions with strong credit ratings. “These securities will benefit from lower long-term interest rates and have attractive yields in the 6-9 percent range,” he says.
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