With bond yields returning to some of their highest levels since the global financial crisis2 and some investors reporting marked improvements in the investment grade (IG) credit market,3 BNY Mellon Investment Management's Peter Bentley believes fixed income holds scope to offer investors some compelling opportunities in the months ahead.
Credit is an increasingly attractive prospect for global investors, offering both rising yields and low default risk across global markets, according to BNY Mellon Investment Management's April LaRusse.
After years of low interest rates, she says, markets are now back to levels where investors can more accurately assess risk and return prospects across a range of fixed income assets.
“Some investors are looking at fixed income with new eyes. Finally bond yields look like they are a really attractive proposition while default risk in credit is currently low,” she adds.
Amid this improving picture for fixed income LaRusse notes that the absence of a widely predicted recession has left analysts puzzling as to why usually reliable forecasting data appears to have misled markets on the timing of an expected downturn.
“Recent US yield curve indications suggested a recession was coming, yet it has so far failed to materialise. With inflation back, one possibility is that we have all been looking at the wrong numbers, with nominal GDP numbers possibly a better gauge of where we are at than real GDP data. Indeed, nominal GDP levels suggest the economy may be in much better shape than we previously thought.”
Market outlook
Either way, LaRusse believes there is still at least some risk of an economic ‘hard landing’ in 2024. This, she adds, coupled with higher inflation levels, could have some seriously negative consequences for both economies and global investors. Yet despite this possibility, she remains broadly upbeat on fixed income market prospects in 2024.
“While the recent period of high inflation has undoubtedly damaged the credibility of some central banks and government indebtedness remains a concern, investors can look to a number of positives, with companies and households financially strong.
“We think companies, in particular, look pretty resilient, and if you are going into a period of slowing growth, it is better to do it from a strong starting point. From a wider market perspective, we believe credit looks at its most attractive in 15 years.”
With the energy sector an important source of debt issuance, one trend LaRusse is watching closely is the transition from fossil fuels to renewables. With debt helping to underpin the funding of many renewables projects, she sees potential benefits and risks facing both companies and fixed income investors in the wider transition to a carbon free future.
“While governments have been encouraging oil and gas companies to spend less on mining and drilling and encouraging them to try and find other ways to generate energy, the transition itself is complex. Clearly we have seen some geopolitical events – such as the war in Ukraine - which have driven energy prices up,” she says.
“Much recent energy investment has moved to renewables and everybody loves the idea of green energy as long as it is cheap. The problem is that some of the companies making wind farms and other renewables facilities are finding they cannot make money out of them and are cancelling some projects. In some cases, costs have turned out to be much higher than these companies imagined and they are not being allowed to charge the energy costs they would like to end consumers. This is just one of the challenges facing our wider transition to cleaner, greener energy.”
Global view
Taking a wider market view, LaRusse sees positive signs in the global investment grade credit sector and believes fixed income will attract more inflows from other asset classes in 2024. Yet she also cautions the unpredictable nature of geopolitics may call for a more global approach to asset selection.
“Because there are so many geopolitical and economic shifts in investment globally it pays to think across geographies and sectors. Then you can identify where the value is as it shifts and allocate investment accordingly.
“What we do know is that credit yields are looking very attractive right now for investors who can identify the market relative value opportunities out there.
“With bond yields in some cases moving well above equity yields we expect to see some wider asset allocation shift to areas such as investment grade credit this year. In our view, solid fundamentals across the corporate debt sector should also limit defaults in the year ahead,” she concludes.
