"Tighter financial conditions have made housing increasingly less affordable and while adjustable-rate mortgages are not a major problem in the United States, they are definitely a concern in the UK and in Australia.”
With that in mind he thinks “sharp” price adjustments could take place in future, and as all are negative for economic growth, the potential is for long duration assets to do well, following the inflationary period where shorter duration performed best.
In terms of where he is finding value, he says: “The recent widening starts to bring credit spreads in a more attractive territory. Looking at Europe for example, the lower quality segment of the investment grade market (bonds rated BBB by major credit rating agencies) and the higher quality segment of the high yield market (bonds rated BB by major credit rating agencies) are offering today spreads versus current yields on German bunds not too far from those seen during the Covid crisis. Even very defensive names in the telecommunication or healthcare space are offering today yields in the 7-9 per cent range.”
Edward Park, chief investment officer at Brooks Macdonald, said the higher yields offered on even short-dated government bonds was now "compelling".
He says: "The conversation with clients and advisers around bonds has changed. For a long time it was about how we needed to invest somewhere else to get yield because bonds didn't have much, but now the yield, even on the shorter maturity UK government bond is over 3 per cent, and as they are shorted dated, they are less sensitive to interest rate rises."
Traditionally, an investor who is seeking protection from recession would buy longer dated bonds. This is because the traditional response of policy makers to a recession would be to cut interest rates, and therefore the longer the income is locked in on the bonds issued before the rate cut happened, the more valuable those bonds are.
But, continuing the theme of bonds reacting differently, Park said we could well have a recession where inflation remains high, and, with central banks focused on fighting the latter, rates could still rise, sharply hurting the price of longer dated bonds.
Simon King, chief investment officer at Vermeer Partners, is another investor keen on bonds right now, and also on the short end of the curve.
He says: "Bonds are definitely becoming more interesting. We have avoided them for some time but are now having a serious look. We are still bearish on inflation and as such believe interest rates will peak higher and stay higher for longer than the market currently anticipates.
