The ability for bonds to deliver income, diversification and capital preservation for investors is much stronger in a high-rate environment, according to PIMCO.
Interest rate markets had provided a wild ride in recent months as central banks worldwide grappled with inflation and the Reserve Bank of Australia moved away from its stance of no interest rates until 2024.
“We’ve gone through a long period of repressed yields and repressed volatility. The policies of over-exuberant central banks have driven many investors into risky assets under the belief that there is no alternative,” said Adam Bowe, portfolio manager Australia at PIMCO.
Yet, despite a continuing tightening of financial conditions, Bowe believed there were opportunities for bonds to play a more important role in portfolios by delivering three key principles of fixed interest: income, diversification, and capital preservation.
He added that the ability to deliver all three of these principles was much stronger in a higher interest rate environment.
Speaking at the IMAP Independent Thought conference in Sydney, Bowe said the volatility of the first half of 2022 had dissipated and opened up many attractive opportunities in the global bond market.
For the first time in many years, high-quality bond portfolios were offering yields comfortably above long-term central bank inflation objectives. Yields on core bonds were at 4%-5% and more credit-focused bond funds were yielding 6%-8%.
“So, after a challenging period of searching for yield and income for investors, the higher adjustment in interest rates – and some of this has been a widening of credit spreads – has really opened up that opportunity set,” he said.
Dr Isaac Poole, chief investment officer at Oreana Portfolio Advisory, agreed bonds were an interesting asset class at the moment. He said it had been a challenge over the last few years to speak to clients and investors about the role of fixed income in portfolios.
“We’re come through a period to the end of 2020 where multi-asset managers and consultants were saying it’s the death of the 60/40 portfolio and there’s no longer a role for fixed income in portfolios. But that’s not the case. We’ve had a reset and it looks like the 60/40 model will deliver on its promise and goal for a wide range of investors,” said Isaac.
“The challenge that we’re all facing as asset allocators, portfolio managers and advisers is that a lot of education is still required on the fixed income side to get people back to the realisation that you can reduce your risk and get better returns now, and fixed income is a critical part of driving that.”
