Fixed income: choosing a different rhythm

Increased risk appetite and revived hopes for a soft landing present an interesting question to fixed-income investors: how keenly should they dance to the market’s tune? Economic data continue to indicate a slowdown, yet corporate earnings and the labour market have not deteriorated significantly. Meanwhile, central banks remain committed to suppressing inflation – even at the cost of growth. In the Q3 2023 issue of Alphorum, we make the case for finding your own rhythm. Key points include:

• Sovereigns in focus. We are constructive on sovereign fixed income: current yield levels, the growing certainty that rates are peaking, and the welcome return of the negative correlation between credit and duration risk make government debt a key source of diversification, in our view.
• Defence and offence. With inflation shocks potentially giving way to growth scares, and the credit-duration correlation now negative, we consider the appeal of a barbell approach combining the carry of corporate debt and diversification effect of rates through a sovereign fixed-income exposure.
• A fallen angels housewarming? Regular readers will know we keep a vigilant watch for new fallen angels: bonds that have been freshly downgraded to high yield but retain solid fundamentals, in our view. Although tighter lending conditions are affecting the real-estate sector, we believe the asset quality and inflation-linked rents that some new fallen angels are exposed to can support price recovery.
• Green growth. Robust sovereign issuance has helped global labelled-bond volumes in H1 almost match those in the same period last year. We provide a mid-year assessment of trends in the market for green, social and sustainability-linked debt – an important source of investment opportunities and finance for transitioning companies.

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