Bond markers have grown increasingly attractive to investors in the face of volatility and the risk of stagflation, says Raymond Sagayam, CIO of fixed income at Pictet Asset Management.
According to Sagayam, the shakeout of the past year has lifted yields across the fixed income universe to levels where investors have significant margins of safety. However, Sagayam says “caution is warranted” in light of geopolitical and macroeconomic upheaval.
He says: “While in some respects inflation appears to be moderating, it’s unlikely to fall as fast as central bankers expected a year ago. Which is why it’s premature to draw the conclusion that the war against inflation has been won. The risk is that central banks now maintain rates higher for longer.
“Investors should perhaps ease back into fixed income rather than plunging head first. And they need to be selective.”
For now, Pictet says short-dated bonds look most attractive almost across the board, given inverted yield and credit curves and very attractive breakeven yield. As developed central banks reach the end of their tightening cycles, potentially in 2023, longer dated sovereign debt will also start looking more attractive.
According to the firm, emerging market debt looks interesting from a tactical point of view, with emerging market economies in much healthier positions than they were in previous cycles and emerging market central banks further ahead of the inflationary curve, offering meaningfully higher real rates than their developed market counterparts. In addition, emerging market currencies are deeply undervalued, especially against the dollar.
Meanwhile, corporate credit is likely to lag the other markets as companies feel the squeeze from rising interest rates, inflation and slowing demand.
Sagayam added: “It’s still early days, but bond markets are more attractive to investors now than they have been for years, in some cases decades. Volatility and the risks of widespread and stagflation spreading is still a hazard to all risky assets amidst a still tenuous geopolitical backdrop. But there are now compensations for the risks investors face – especially in the bonds market.”
