Fixed-income investors have experienced considerable turbulence in recent years, with some still scarred by double-digit declines in credit markets in 2022. Unsurprisingly, many fixed-income investors have parked their cash in savings accounts. However, falling interest rates suggest now is the time to refocus on bonds. At BNP Paribas Asset Management, by combining multiple perspectives, we can identify the areas of fixed income that offer the best emerging opportunities to investors.
An improving background for fixed income
Globally, the macro picture is more positive for fixed income than it has been for some time. Inflationary pressures may have abated, and central banks have embarked on a rate-cutting cycle albeit at different rhythms. In addition, the world economy is still growing at a reasonable pace, with low and stable unemployment rates.
Consequently, and with interest rates falling and yields in fixed income at attractive levels, investors are now incentivised to move their assets out of cash and back into fixed income. There is, however, another important advantage to fixed income: it can provide both a haven from financial-market volatility and, by executing carefully targeted strategies, opportunities to profit from that volatility.
That is a highly attractive feature given the turbulence that has characterised global markets for the past decade – typified by events such as the pandemic, Russia’s invasion of Ukraine, and the geopolitical tensions under the Trump administration. The uncertainty appears likely to continue and, consequently, the potential for further shocks that could roil fixed income globally is considerable.
The benefits of a flexible approach to fixed income
Critically, long-term bond yields are much more susceptible to these shocks than the short-term instruments, while demand for short-term bonds is also expected to remain robust, limiting the upside for yields. That’s because investors are rotating away from increasingly lower-yielding money-market funds to higher-yielding instruments as interest rates around the world trend downwards.
There is also a strong argument in these volatile and ever-changing times, for having a diversified portfolio with dynamic allocations and multiple return streams that responds to market and economic conditions and evolves over time. Diversification can therefore significantly reduce isolated fixed income sector risk.
Furthermore, by deploying long/short strategies, it is possible to generate returns whichever way markets are moving. These strategies, which can help smooth returns, are not part of the opportunity set for managers of conventional fixed-income strategies.
Where to find opportunities
The potential for volatility in fixed-income markets is a global phenomenon, reflecting an uncertain geopolitical and economic background. However, it is particularly relevant in the US, given the uncertainty surrounding President Trump’s policies on trade tariffs, government spending and taxes, as well as America’s political position in the world.
Globally, policy divergence among central banks is creating further pockets of opportunity. Japan, for instance, is moving in the opposite direction to the Fed and the European Central Bank by raising rates in response to ongoing wage pressures. This divergence creates opportunities to underweight Japan’s bond market relative to other sovereign bond markets.
There is another advantage to investing globally. It is intrinsically, a highly diversified approach both by geography market and by fixed income sector, potentially giving further protection against instability in key fixed income markets. Therefore, applying a global fixed income investment strategy, and selecting attractive opportunities from the broad fixed income universe allows managers to uncover opportunities created by market volatility from across the world.
There are also opportunities for investors in current-coupon securities, given that bonds, where the market price is at or near the face value at which they were issued, tend to be relatively sensitive to market volatility. Indeed, with increased volatility, the difference between yields on current-coupon securities and the benchmark yield on structured products has widened to attractive levels.
To sum up, the short-term bonds targeted by our absolute return bond strategy are among the securities that should appeal to investors seeking sustained yields and protection for their savings in a volatile world.
Why consider a global absolute return bond strategy?
BNP Paribas Asset Management has a proven track record in fixed income dating back to 1964. Today, we provide a broad range of solutions across single-strategy, multi-strategy and thematic fixed-income allocations. Certainly, with our global capabilities in all areas of fixed income, we can identify emerging opportunities and maximise an unconstrained landscape for investors seeking sustainable returns from global fixed income.
Our absolute return bond strategy’s short duration and capital preservation focus also allows it to moderate risk and volatility, presenting an opportunity to enhance cash returns whilst delivering a smooth performance journey in an investor’s portfolio. For example, by investing across different sectors, such as emerging-market debt, developed-market credit, structured securities and/or currencies using a benchmark agnostic approach, it means the potential alpha generating opportunities to exploit are vast which helps to build resilience and helps navigate difficult conditions.
In addition, the flexible nature of the strategy allows us to exploit market environments where yields move up or down. Consequently, give the potential to provide an appealing alternative to investors thinking of leaving cash on deposit but wishing to stay invested in a defensive, short duration asset class.
However, navigating investment opportunities in a volatile environment requires a robust, risk-controlled approach and proven expertise. At BNP Paribas Asset Management, our fund managers combine the multiple perspectives of over 100 dedicated fixed-income professionals in seven countries to identify the best opportunities in short-term securities across the world and to deliver compelling, consistent, sustained returns to investors.
