The positive view towards fixed income is best expressed through the higher-income segments of the market given robust nominal GDP growth and elevated all-in yields that are still in excess of the historical returns of global equities.
The outlook for the asset class is supported by the shifting bias of central banks as they start reducing the level of policy restrictiveness. We expect this process to be gradual over time, which will allow investors to take advantage of the attractive carry on offer over the medium term. At such levels of yield, time in the market becomes more important than timing the market given that the yield helps buffer against bouts of volatility. A backdrop of resilient growth and above-target inflation supports portfolios skewed towards credit over interest rate duration, and favours high-income segments such as high yield through CDS indices and the AT1 market. We would be more cautious on traditional investment-grade credit given the government bond risk it entails at a time when inflation and budget deficit concerns could resurface.
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