Bonds, an option before the economic crash | markets

This year started as the worst in the historical streak for bond markets, but the story is far from over. The US 10-year bond started at 1.5% levels, reached 3.4% (with consequent losses in its price) and is now around 2.8% yielding. At the same time, the prediction of the inverted rate curve as an infallible indicator of depression began to be fulfilled. Debt for one year and two year rents are more than 3%, compared to 2.8% for 10 years.

“Long-term rates are unlikely to rise significantly above their current levels,” says analysts Eric Wiseman and Benoit Ann of MFS Investment Management. However, rates on the short end of the curve could continue to be subject to hikes by the Fed and the labor market. In private credit, they consider that “if the economy continues to deteriorate, credit spreads will widen, which requires careful analysis,” they comment.

The deterioration of the margins that the European Central Bank wants to avoid in European public debt, and in the absence of more details, assumes, as Lagarde announced, a desire to buy marginal bonds again to avoid gaps between countries.

They pointed out from Goldman Sachs that despite the fact that the European Central Bank has also affected the potential purchase of peripheral corporate bonds, this measure is difficult to implement and will have little impact on this market.

For his part, Paul Grainger, head of global fixed income and currencies at Schroders, expressed optimism: “Bonds can now offer the most attractive valuations for many years.” He gives three reasons for buying bonds: levels become attractive again and are a good diversification factor, especially in periods of economic uncertainty, and finally, with high inflation and slower growth, increases in species will not be very many,” he concludes.

Banking analysts, for now, are cautious and prefer short-term bonds over long-term bonds. Likewise, they recommend avoiding high-yield (low quality) bonds, “in light of tightening financial conditions and an expected deterioration in risk measures.” Finally, they chose investment grade (higher quality) bonds from the United States at the expense of the eurozone, the main war-affected region in Ukraine.

For Ben Lidler, Global Markets Analyst at eToro, “Bonds are once again attracting interest as recession risks rise, inflation expectations subside, and their yields already skyrocket.”

Another view held by Rob Lovelace, vice president and chief equity officer at Capital Group, is about returning to fixed income after many years of zero rates. “We cannot underestimate the importance of this change, because it can return to fixed income and its function of real diversification in terms of stocks,” the expert explains. Income that will also be felt in banking products.