In Focus: Fixed income  

Why are bonds interesting right now?


The higher yields offered on both corporate and sovereign debt make bonds attractive right now, especially as the country stares into the face of a recession, says Mike Coop, chief investment officer for EMEA at Morningstar Investment Management.

In the latest fireside chat with FTAdviser In Focus, in partnership with Pimco, Coop said: "With the levels to which those yields have now risen, we think there's greater scope for those government bonds and high-quality bonds to be able to play a good role in a portfolio in a severe recession."

He added: "The higher yields in and of themselves simply mean higher returns if you're just looking at a buy and hold approach. So clearly they become more attractive and the question, of course, is how much is the right amount to allocate."

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He said the increase in rates that everyone had expected to happen was now priced in to a much greater extent than before.

"The central banks clearly are responding to inflationary pressures," he said. "You can argue that perhaps they should have responded earlier and they should have responded to a greater degree but it is very clear from their actions... that they are recognising how important it is to re-establish their inflation-fighting credentials and therefore to tip the balance toward weaker growth."

One area Coop finds attractive at the moment is emerging markets but high yield, which some liken to EM debt, was less attractive, he said, describing the market as "episodic" in the event of a recession.

Last month investment managers Gramercy and Vanguard came out to say EM was offering corporate debt investors a golden opportunity, saying corporates’ fundamentals were looking good, partly helped by high commodity prices, and buying debt could be a good bet.

The way emerging markets have developed since the 80s and the prices currently offered made them an attractive target, said Coop.

"They do already to some pretty reasonable degree reflect many of the risks that have emerged and the pricing is such that there is a much greater margin of safety that you as an investor are getting compared to developed market bonds, in our opinion." 

Overall, the single most important aspect for a bond investor right now was "whether you think the central banks are going to be successful in their mission to control inflation", said Coop.

He said historically it was clear that when central banks had a mandate with inflation targets, inflation was typically lower and more stable.

If the current framework for monetary policy were to change materially "that would have very significant consequences for bond investors".

"As a bond investor that's what you really want to have a clear view on." 

To hear more about why bonds are interesting right now and how to generate good outcomes for investors in a portfolio using bonds, click on the image above.