Diversified Fixed income Portfolios

Yield levels of most fixed income asset classes remain attractive from a historical point of view 

Eleven months ago we published a note where we discussed about the opportunity of increasing duration in fixed income portfolios as interest rate hikes were coming to an end and existing yield levels were mitigating possible further hikes and as we discussed in our Quarterly Market Outlook: Q2 2024, "Softer landing moderates rate cuts", rates will be reduced, but only moderately. 

This moderation in rate cuts is putting pressure on government debt in particular, with the result that several indices entered negative territory in April. Despite all the volatility caused by the monetary policy debate, the fact is that, at current levels, most fixed income asset classes have attractive yields in historical terms. 

As we have seen, yields on the various fixed-income asset classes are close to their 10-year highs. History shows that, in fixed-income, initial yields (in terms of Yield to Worst) are a reasonable estimate of expected returns for the next 5 years.

By analysing historical data on initial yields of the various indices and how they performed over the following 5 years, we find correlations of over 80% in most asset classes. In those cases where the correlation falls below 80%, it is because the asset suffered especially during the rate hikes of 2022 and 2023, as is the case with emerging debt. 

The conventional tendency to accumulate cash in periods of uncertainty has been reinforced in the last two years as rising interest rates have increased the attractiveness of investing in cash compared to other fixed income options. In fact, at the end of March 2024, positions in U.S. money market assets exceeded USD 6 trn, an all-time high. This trend was also in evidence in other geographies such as the euro area.

We believe that the best option is always to build a diversified portfolio that can give us access to all asset classes while controlling exposure and the risk assumed.

To do so, we recommend that you contact your financial advisor and select a portfolio with several flexible, global strategies that use complementary approaches in a way that suits your risk profile.

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