Fixed income in focus: Unlocking value across the bond spectrum
Key takeaways
Central banks face a shift from inflation concerns to growth risks, leading to varying interest rate policies across the US, UK, and Europe.
Credit spreads are tight, requiring disciplined active management to find value and avoid mispricing risks.
Investment strategies focus on high-quality credits, liquidity, and flexibility amid fiscal policy uncertainties and market volatility.
Fixed income in focus: Unlocking value across the bond spectrum
In our latest webinar, Market Insights Strategist Ben Gutteridge joined fixed income Fund Managers Stuart Edwards, Rhys Davies, and Tom Hemmant to explore the complexities of today’s market landscape, and offer insights to help investors navigate uncertainty and uncover new opportunities.
If you missed our webinar, you can read our key takeaways below or watch the replay to see the full conversation.
Market environment and macro-outlook
The macroeconomic backdrop is shifting away from inflation concerns toward downside growth risks, with central banks like the Federal Reserve and Bank of England navigating sticky inflation and growth uncertainties. The European Central Bank has had an easier time cutting rates and stabilising inflation in contrast to the Fed and the BoE.
In the US, recent interest rate cuts are viewed as "insurance cuts" amid a loosening labour market, and further cuts are likely into next year. In the UK, government debt sustainability appears to be a longer-term concern, with recent fiscal policy moves potentially creating a virtuous cycle of improved fiscal credibility, lower inflation, and reduced yields, but risks remain on both sides.
Credit market conditions and risks
Credit spreads are historically tight, making it challenging to find value, especially in sectors like autos, which face structural and cyclical pressures. New bond issuance by relatively unknown companies has been driven by strong demand for yield, which has compressed spreads, increased the risk of mispricing, and lowered lending standards. This emphasises the need for discipline and caution.
Active management is crucial in this environment to avoid pitfalls and identify pockets of value, though opportunities are fewer than in wider spread markets.
Investment strategy and positioning
Tom Hemmant noted that his team’s funds are generally positioned more cautiously, with a focus on higher-quality credits and building liquidity to be ready for market volatility or sell-offs. Duration is managed actively, with some leaning long but also trimming exposure as spreads tighten.
“We started with a short duration but extended it in 2022 when rates rose and have generally kept it slightly long since then'' Tom Hemmant said. “However, we’ve stayed flexible, adjusting our exposure as the UK gilt market moved, especially during recent rallies.”
Financials remain a core allocation due to improved credit quality post-GFC and attractive yields, Tom Hemmant said, but with a shift toward higher quality names and senior bonds rather than riskier subordinated debt.
Sturat Edwards added that emerging markets are also seen as a source of value due to high real yields driven by hawkish central bank policies and structural reforms in countries like Brazil and South Africa.
Debt sustainability and fiscal policy impact
Debt sustainability is a recurring theme, with concerns about government balance sheets and the blurring lines between credit and government bonds. The UK’s fiscal situation is highlighted as an example where improved budgetary policy could reduce yields and inflation, creating a positive feedback loop.
Market reactions to fiscal policy announcements are significant, with the potential for both positive and negative outcomes depending on government actions. The speakers said they remain vigilant about these risks, incorporating them into investment decisions.
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