Cover story – Fixed income
Bonds endured a difficult 2022, but with indications that it could be a different story this year, investors need to look again at their approach to the asset class, says Andrew Holt.
Last year saw fixed income reach crisis proportions, especially in the face of Liz Truss’ disastrous short-lived premiership. The depth of investor suffering is highlighted by Bloomberg’s global aggregate bond index which bombed by 16% in 2022. This is its worst performance since 1991, putting the other fixed income crises during the past three decades in the shade.
That was just one shock to the investment system last year and should be put into a wider picture of a global correction in bond markets. The good news, however, is that it could be argued the wild-west environment in fixed income has come to an end.
One scenario could see bonds being the big winners in 2023, while the worst-case outcome could see the asset class sup- porting portfolios during a deep recession – which everyone from the Bank of England to the International Monetary Fund agrees we will have this year, if we have not entered it already.
Another big boost for bonds is the broader macro picture. As global macro trends temper inflation and central banks pause their rate hikes, bonds should, if this proves to be the ortho- doxy, be the big winners.
18 | portfolio institutional | February 2023 | Issue 120
This is particularly true of high-quality bonds, which have historically performed well after central banks stop raising interest rates, even when a recession follows. This presents a case for re-thinking fixed income, despite the travails of the past few years. Bonds appeal to Liz Fernando, Nest’s deputy chief investment officer. “Following their dramatic sell-off in 2022, we find bonds more attractive as their prospective returns have improved. We now see developed market sovereign bonds as, selectively, investible,” she adds. This would be a turning point for the master trust. Like most defined contribution providers, its growth-oriented portfolio is heavily concentrated in equities.
Surging yields
It also appears that the income drought is over. “The lure of fixed income is strong as surging yields mean bonds finally offer income,” says Scott Thiel, chief fixed income strategist at the Blackrock Investment Institute. “Higher yields are a gift to investors who have long been starved of income.” A point shared by Steven Meier, chief investment officer of the New York City Retirement System. “Yields have backed
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