Amid continued low bond yields, keep up the hunt for income
- We expect bond yields to remain low given central banks’ tremendous support so far and their commitment to do more if necessary. This is “financial repression reloaded” – a continuation of the policies implemented a decade ago (including low interest rates and increased regulations) to help countries grow their way out of debt.
- Monetary and fiscal support may generate higher inflation in the medium to long run, but we don’t expect inflation to be a major factor in the pricing of nominal bonds. Still, we are finding value in some inflation-linked bonds.
- We are neutral to positive on the credit sector overall. While valuations are not overly attractive and global indebtedness is at record levels, central banks are price-insensitive buyers, and they will continue to directly intervene in investment-grade bonds and, to some extent, high-yield bonds. This will likely provide substantial support for this sector.
- “Fallen angels”, in particular, could be attractive in this environment. Convertible bonds are also interesting, since they have historically performed well in times of volatility and offer potential upside from their equity-like characteristics.