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    Opportunities in fixed income

    Opportunities in fixed income

    29 March 2023 Fixed income
    Navigating the last fifteen months proved difficult for fixed income investors; yields across risk-free and credit markets forcefully shifted upwards for several well-established reasons, inflicting considerable losses on bond portfolios.

    However, while this period represented a significant challenge for fixed income investors, we believe the resultant normalisation in yields potentially represents the best opportunity for fixed income investors to exploit in the preceding fifteen years. There are now considerable opportunities to use credit to enhance income generation, and the potential to achieve long-term return objectives via income alone.

    This paper attempts to arm investors on ways in which they can take advantage of the rise in yields, outlining our favoured active trades across rates and credit markets, as well as some less obvious allocations we think investors can make to enhance overall portfolio resilience.

     

    In our view:

    • Rates investors should consider using yield curve steepeners, an allocation to inflation-linked TIPs and, where feasible, take advantage of global dislocations, such as the excess yields currently offered by longer-dated Japanese government bonds on a hedged basis.
    • Improved corporate balance sheets and better visibility of cashflows reinforce the attractiveness of credit. Credit investors can exploit curve inversion to obtain higher income in shorter-maturity issues, without compromising on interest rate risk or duration.
    • The broad upward shift in yields also presents opportunities for investors to enhance overall portfolio resilience by allocating to less traditional fixed income assets, namely US municipal bonds, convertibles and asset-backed securities.
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