15/03/2023
A new yield environment for short-term fixed-income
Interest rate adjustment offers a new yield outlook for the conservative short-term fixed-income investor
European investors with a conservative profile have been heavily penalized over the last decade as a result of the ultra-expansionary monetary policy that kept interest rates in negative territory until just over a year ago. Low-risk investment options to generate returns have changed significantly in recent quarters thanks to the interest rate readjustment that the European Central Bank has had to implement to combat inflation. The final phase of this rate adjustment is approachingand this provides a clearer outlook for fixed-income investment.
Managers of mandates for this asset class can capture the value of the interest rate curve, which is already discounting the ECB raising rates to around 4%. Additionally, the economic growth outlook for 2023 has improved, creating a more favourableenvironment for investing in high-quality corporate bonds. The combined increase in yields from the government debt curve and the credit risk premium creates a favourableenvironment for investing in low-risk fixed-income strategies: short-term high-credit quality.
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+3.7%
Short-term € government bond yields
Source: Bloomberg. Data as of 8 March 2023. -
+0.5%
Expected Euro area GDP growth in 2023
Source: Bloomberg economists' consensus. Survey on 8 March 2023. -
1.20%
Credit spread: high-quality corporate bonds vs. govies curve
Source: Bloomberg. Data as of 8 March 2023.
Changing environment for returns on low-risk investments
We believe that the negative impact of additional interest rate hikes is more limited, given the high level already attained. Moreover, economists' consensus expects inflation to gradually decline in the coming months. We are in the final phase of calibrating monetary tighteningand it is a good time to invest in the short end of the curve by capitalizing on the terminal rate of this phase of rising interest rates.
The yields offered by the Euro area yield curve have experienced an additional rally in recent weeks. This movement implies a cumulative change of 4% in yields to maturity on short-term government securities since March 2021. Conservative fund managers can now obtain returns in excess of 3.5% with high-quality, liquid securities.
Quality corporate bonds also offer value
Improved prospects for yields by combining short-term government bonds and quality corporate bonds.
The recent improvement in economic growth prospects for the Euro area in 2023 enables managers to invest in low-risk corporate bonds.
High yields with low-risk strategies
It is not necessary to adopt long-term positions to obtain positive yields.
Mutual funds focused on the short end of the curve enable investors to obtain better returns than are available in the money markets. The inverted curve provides additional yields without having to invest for the long term.
Seek collective investment vehicles that have a well-diversified portfolio of conservative fixed-income instruments, with extensive experience in managing and selecting high quality credit and curve positioning.
The risk/return trade-off at this point in the cycle has improved significantly in the short end of the curve and in issuers with high financial strength.
How to position in this rate environment?
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