For fixed-income managers who’ve had a rough couple of years and a few false starts, the outlook is decidedly brightening.
Investment-grade bonds have seen three straight weeks of inflows, according to Bank of America Corp, citing EPFR Global data. It’s a relief for an asset class that as recently as October suffered its biggest outflow since March, and has spent the better part of two years plagued by losses as central banks hiked rates to combat inflation. And similarly for government bonds, especially given that U.S. Treasurys in September saw their first outflows since 2021.
It’s early days yet. Investors have been burned more than once during the latest hiking cycle, betting on market shifts that turned out to be false starts—including calls made at this time last year. And current expectations are for rates to remain higher for longer.
But the confluence of economic signals is convincing a growing cadre of investors that this time is for real. Consumer prices are cooling in major economies, and economists place a 50% or greater chance of a recession in the U.S., U.K. and Europe. Some policy makers are pointing out the time it takes for rate hikes to feed through, so there’s growing optimism the tightening cycle is near an end.
This encouraging trend—along with the most attractive yields in years—is giving investors incentive to dip back into debt that’s among the most sensitive to changes in interest rates. Investors are the most bullish on bonds since the global financial crisis, according to BofA’s latest fund manager survey.
“There’s enormous amounts of cash on the sidelines hidden away in money market funds or deposits because investors didn’t know when central banks are going to stop hiking,” said John Taylor, director of global multi-sector at AllianceBernstein LP, a $650 billion asset manager. “But now people are getting more and more confident that rates have peaked and you could see fixed income funds benefit—especially investment grade funds.”
The shift is starting to show up in returns: Global investment-grade corporate and government bonds are on course for their best month in a year, and have just about erased 2023’s losses, according to a Bloomberg index. And a gauge of global company bonds is headed for its first gain since 2020.
Managers at Pimco, one of the world’s biggest bond investors, are predicting “prime time” for fixed-income in 2024, while DoubleLine Capital recently made its most aggressive bet on high-quality corporate bonds in years. Strategists at Goldman Sachs Group Inc. recently upgraded their bond view for the first time in three years, betting fixed income will beat cash as inflation cools and central banks end policy tightening.
“We favor moving out along the maturity spectrum in an effort to lock in yields and anchor portfolios over the medium term,” Pimco managers led by Erin Browne said in a report.
Early signs are the investors are doing just that, with longer-dated U.S. corporate bonds soaring in recent times, returning more than 7% in November and far outperforming shorter maturities, according to a Bloomberg index. An analysis of gauges that track long- and short-dated global corporate and government bonds tell a similar story.
Bond sales by the U.K. and the European Union both received record demand, with the U.K. in particular garnering a whopping £93 billion ($116 billion) of orders for a £7 billion sale of 20-year bonds.
Meanwhile, companies from L’Oreal to Tapestry to Bayer have found ready buyers for new debt despite crowding into a busy week for corporate bond sales. There have been more than $135 billion worth of investment-grade corporate bond offerings in Europe and the U.S. so far this month, the most since September, which is traditionally one of the biggest months of the year for bond sales, according to data compiled by Bloomberg.
These investment-grade rated companies are sitting in a sweet spot, according to some, as they avoid the worst of any potential rates volatility while also not being as exposed to economic malaise as their junk-rated counterparts.
“You’ve got a bit more of a spread cushion on investment grade over government bonds and that encourages people. And in a soft landing environment they shouldn’t move materially wider whereas high-yield bonds can,” said Taylor of AllianceBernstein.
Even after falling more than half a percentage point since a recent peak of almost 6% in October, the yield on global corporate debt is about double the 10-year average, according to a Bloomberg gauge. The last time it was consistently that high was in 2009.
Evidence is mounting that the world is near a peak in rates, but there’s scope for disappointment on expectations for cuts, Fraser Lundie, head of fixed income at Federated Hermes in London, told Bloomberg’s Credit Edge podcast.
“While it looks like we are traveling in the right direction now, it is pretty likely to be bumpy,” Lundie said. “I say that because this has not been a normal cycle by any stretch, when you think about the implications of Covid and wars and so on, making like-for-like comparisons that bit more difficult. So the data is going to continue to be jumpy and hard to read from a trend perspective.”
Cameron Crise, a Bloomberg macro strategist, said, “It’s hard to argue with the bond market’s momentum at this point, but it’s probably worth keeping some sort of perspective in mind. Markets have a funny way of overshooting in both directions.”
For now, there is still a good chance of a less damaging “soft landing.” And the consensus in any case is that rates are unlikely to rise, which alone helps boost the case for investment-grade debt. Gene Tannuzzo, head of fixed income at Columbia Threadneedle Investments has been bullish on bonds this year, but moved to short-dated debt helped with returns. The Strategic Income Fund he helps manage is up 4.6% this year, beating 83% of its peers.
“There is convincing evidence that we have reached a turning point,” he said.
This article was provided by Bloomberg News.
