Activate flexible fixed income allocations

Invesco fixed income capabilities are designed to capture market potential.

Act on flexible fixed income opportunities

After a savage bond sell-off in 2022, fixed income markets are offering strong income opportunities at attractive valuations for the first time since the global financial crisis. 

Now is a good time to extend duration and lock in these yields before markets change. Gain access to diversification benefits and risk mitigation with our flexible fixed income approaches.

Quality meets opportunity

Why is investment grade fixed income attractive?

Increased market and economic uncertainty warrants a greater focus on high quality assets and defensive investment strategies. 

Even after the flight to quality that followed recent banking sector events, investment grade yields remain at their most attractive since the 2008 global financial crisis.

We think investment grade fixed income makes sense in this environment.

Corporate bond returns are typically strong 12 months after the cycle low

While rates look like they may be peaking, with markets rallying in January, now could still be an attractive entry point.

Figure 1 plots corporate bond returns during a period of over 50 years, detailing the highs and lows. The grey shading draws attention to the 12-month periods following major lows.

Historically, corporate bond returns have been strongly positive for a sustained period following major market selloffs.

Figure 1. Corporate returns are typically strong in the 12-month period following the end of a Fed hiking cycle

Source: Macrobond as of 28 February 2023. Historical analysis reviews Bloomberg US Corporate Index annualised rolling 12-month return data dating back to index inception. Grey highlights signify the 12 months following the 12-month annualized low greater than -5%. An investment cannot be made in an index. Past performance is not a guide to future returns.

Global and regional opportunities

The global economy is not out of the woods just yet but yields remain very compelling. Against the impacts of recession and rate hikes, a more defensive asset class like investment grade (IG) fixed income could prove more attractive than higher yielding assets. 

In Asia, rates have been the main driver for Asian IG bonds. Reduced rates volatility and faster recovery in China supported the rally in fixed income assets globally, with emerging markets (EM) and Asia leading the rebound. 

Diversification and yield potential

Emerging market opportunities: why now?

We believe emerging market (EM) local debt is set to outperform over the next several years after the asset class suffered one of the largest selloffs since the 1990s in 2022.

Global financial markets and economies endured a series of geopolitical shocks and market volatility. Now these negative shocks are abating and evolving global macro conditions are expected to favour EM countries. We believe global interest rates are set to stabilize and monetary policy will focus on fighting inflation. In the meantime, China has started to reopen its economy. With inflation peaking, we think EM yields in real terms are at especially attractive levels. EM local bond yields have been at a level not seen in more than a decade. (Invesco data as at 31.01.2023, unless otherwise stated.)

We believe that emerging markets local currency debt features differentiated alpha and income generation potential with meaningful client portfolio diversification benefits.

Hemant Baijal, Head of Multi-Sector Portfolio Management, Global Debt, Invesco

What does history tell us?

Periods where EM local debt yields are materially higher than US Treasuries have typically been followed by EM outperformance versus the broader US bond market. For example, after the yield differential widened to over 400 basis points in 2011, EM rates outperformed strongly over the next two years. 

Similarly, when the yield differential widened to over 400 basis points in 2015, EM local debt outperformed in 2016 and 2017, peaking in early 2018. With the yield differential currently above 400 basis points, and absolute yields at a decade high, we expect EM local debt to mean revert again, especially as inflation slows in both emerging markets and the developed markets. When the asset class has faced major declines in the past, patient investors who have invested were ultimately rewarded with sharp increases in returns a year later. (Invesco data as at 31.01.2023, unless otherwise stated.)

Figure 2: Emerging market local bond yields are near decade highs

Source: Bloomberg. As of December 31, 2022. “GBIEM” refers to J.P. Morgan GBI-EM Global Diversified lndex. 

Growth dynamics with sustainable investing in China

Why does China matter from an ESG perspective

We believe that the time has come where ESG investing in China is increasingly a why not moment. As China is one of the largest carbon emitters globally, it has adopted one of the most ambitious climate change plan.

As a result, there is potential for fixed income investors to explore the opportunities to enjoy the China growth story in a sustainable way through investing in China fixed income, which has the potential to provide attractive risk-adjusted returns and diversification benefits.

Large and growing universe with attractive yield

China offers attractive yields and trades at a discount to Asian names
China is a yield driver in the investment universe

Source: Aladdin, Invesco, Bloomberg, as of 31 December 2021.

Chinese credits trade at an attractive discount

Source: Aladdin, Invesco, Bloomberg, as of 31 December 2021.

Why invest in fixed income with Invesco?

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