Has a second opportunity opened up in fixed income?

In markets, as in life, there are usually second chances for those who were unable or did not know how to take advantage of the first ones. On the fixed income side, that first train left at the end of October, coinciding with US 10-year yields reaching 5% on expectations that central banks would still have to keep the money supply contracting for an extended period of time. to win the battle. to inflation.

However, since then, in the midst of better-than-expected CPI data in both the eurozone and the US, investors have started buying debt, given the current forecast that rate cuts will occur before half of 2024. that the year could end with a 150 basis point rate cut. A rally then ensues that leaves Treasuries at the aforementioned 5% below 3.8% at the end of December, pushing holders up 8%.

These levels were already requiring entry into fixed income first as the very optimistic scenario regarding short-term interest rates was discounted. So much so that at the beginning of the year, many investors decided to take advantage of these advantages and slightly normalize the situation in this type of asset. return of the American benchmark to the 4% zone. Is this level a second opportunity to enter fixed income?

According to Ignacio Fuertes, investment director at Miraltabank, “the correction could be a little more, given that there are still six rate cuts in the US and almost the same in Europe, which seems too aggressive to us.” “Unless economic data deteriorates quickly or there is an unexpected rise in inflation (as happened this week in the US), it is possible that the curve will wash out some of these declines, and that this, as we have seen in the recent past, will affect risk assets in in general,” the expert adds. In this sense, Fuertes believes that “the European long-term view does not have much value” and they prefer other segments with higher returns, such as emerging markets or inflation-linked bonds of certain economies.

Schroders notes that “history shows that now is the right time to move from cash to sovereign bonds for several reasons. Coupons now offer additional protection to investors, and if we buy into a soft landing scenario, the stock market correlation should return to negative territory.”

“Certainly, 2024 promises big changes in interest rates and bonds, especially if inflation continues to fall or if growth stalls and a recession sets in,” they explain from abrdn. In this vast investment world, the Scottish manager prefers an investment grade “that appears to be the best option if volatility and recession are ahead, whereas if returns are high, the situation is unlikely to improve.” “Fixed income investors have the opportunity to secure some of the highest returns in more than 10 years, making it difficult for bonds to yield negatively even if spreads rise slightly again,” Saxo Bank said.

The curve remains inverted

If we analyze the probability of a US recession through the bond yield curve, it remains high. All sections under six months still offer yield more than 5%. While it is true that these very short-term maturities have leveled off over the last two months, as data on economic activity and growth across the Atlantic is seen to still be holding up.