Fixed income back in the good books

After a few years of volatility and negative yields after Covid, fixed income is now more than capable of providing the protection it is supposed to provide in a portfolio, according to Amundi global fixed income senior portfolio manager, Rajesh Puri.

Following COVID and through 2022, real fixed income yields were negative across much of the global market.

More recently, positive real yields have started to re-emerge in Europe, Japan, and the US, with emerging markets also seeing improvement. This is meaningful for investors, as fixed income is once again better positioned to preserve purchasing power and serve its core role in portfolios

Nominal yields are also much better and provide investors a cushion of protection in any sort of financial crisis. And positive real yields provide much needed portfolio diversification. 

How Covid upended fixed income

Fixed income markets were disrupted during and post Covid due to supply shocks and subsequent government fiscal policies. The realisation during Covid of just how interlinked the global economy was, and the move to production reshoring for many economies, also disrupted bond markets.

“That meant places like Europe, which have relatively structurally low growth rates, had to go through a restructuring. So fixed income as a product lost some of its attributes, and one of the biggest attributes it lost was providing a real income,” Puri said.

As its attractiveness waned, so too did its role in the traditional role in a portfolio, with investors moving allocations from fixed income to better-performing equities and alternatives.

Investors slowly return to fixed income

In a negative real yield environment, unsurprisingly Investors pushed back against fixed income allocations, and if they did invest in the asset class, it was predominantly in Asia, Puri says.

Fortunately, economies have stabilised since 2022 and even with the increased geopolitical uncertainty, real yields in fixed income are again positive and the asset class provides an appropriate and welcome diversifier for most investors.

Across global markets, there are signs that investors are beginning to re-embrace more traditional 60/40 equity/fixed income allocations, alongside a modest shift from equities toward fixed income.

Opportunity in a fragmented world

The different economic cycles in different countries are creating unique investment opportunities for global investors in fixed income. For example, the US economy is in a different stage of the cycle than Europe or the UK. And in Japan the re-emergence of inflation, creates opportunities which have been absent for nearly four decades.

Even China is currently engaging in a fiscal stimulus to support its flailing property market and unemployment which remains high in parts of the country. 

“There are so many different narratives. If you’re a global fixed income player, you can use these dispersions to really deliver the alpha.”

It also means there will be a variety of different government funding programs running at any one time, supporting fixed income instrument supply into the market. As. Result, rates at the long end of the curve are going to remain at elevated levels, according to Puri.

Even with better global prospects, it’s still important to closely examine the opportunities within each segment of the market and take a very selective approach to individual investments.

“You need to consider that the world is very selective in nature, so you can’t make a broad case for everything today. If you look in credit, only pockets of credit are attractive. If you look at duration, you need to think about where to buy, where to sell,” Puri says.

But a positive overall outlook means that fixed income is back to being a very useful tool in any investor’s portfolio.