Jupiter: '2023 will be the most exciting time for fixed income'

Jupiter: '2023 will be the most exciting time for fixed income'
Matt Morgan, head of fixed income at Jupiter Asset Management

The next two years will see the most exciting opportunities to invest in bonds for a generation thanks to attractive bond yields and the likelihood for lower interest rates, the head of fixed income at Jupiter Asset Management has said.

“What will drive markets in 2023 is the speed of deceleration in growth and inflation,” said Matt Morgan.

Many indicators of inflation are already pointing lower, he said, highlighting falling house prices, energy and food prices, and receding bottlenecks in supply chains, including shipping and trucking.

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“The challenge for markets in 2022 was growth and inflation resulting in hawkish central banks. 

“The question for 2023 is how quickly growth and inflation can allow policy to loosen.”

Given how quickly some indicators have slowed since the summer, Morgan has confidence that the deceleration will continue and could even gather momentum.

“That could force central banks to relent.”

However, central banks may have other plans, he said. 

“Markets may be underestimating the Fed’s determination to keep policy tight, no matter what the cost in higher unemployment and slower growth. 

“Looser policy must follow lower growth and inflation, but it may be later than many expect.”

What is certain is that fixed income prices are attractive compared to recent history, he said. 

Tina, which stands for there is no alternative (to equities), has been replaced by Tara (there are reasonable alternatives), he said.

“While the short term path of inflation, growth and bond yields is unpredictable, today’s bond yields mean that investors are paid to wait.”

Morgan said highly rated long term government bonds between 3 per cent and 4 per cent are attractive, both as a “risk-free” source of carry and in anticipation of probable lower long term yields. 

“We would caution investors that a recession will drive default rates, suppressed by monetary policy for so long, to higher levels. 

“While some parts of the high yield market look very interesting to us, it’s crucial to be selective in picking the right issuers that can make it through a more difficult environment.”

Two asset classes that sold off last year more than others are emerging market and bank debt, he added. 

“Many investors are fighting the last war, selling banks for fear of a 2007-8 style financial crisis, which in our view is much less likely today given the much higher balance sheet quality. 

“Emerging markets traditionally suffer in higher rate, stronger dollar environments, but many issuers are much more resilient than they were twenty years ago and look good value here.”

Morgan said one lesson from 2022 is that periods where bonds and equities sell off together are painful for many investors, and liquid alternatives such as absolute return have really shown their value. 

“While traditional fixed income looks very attractive here, diversifying strategies have proven their worth and should stay part of investor portfolios.”