Seek out quality
We believe the recent increase in benchmark government bond yields in USD, EUR, and GBP provides an opportunity for investors looking to lock in elevated yields and diversify portfolios. We do not expect central banks to change their rates hurriedly in response to the rise in energy prices, and even if energy prices stay higher for longer, yields could fall over the medium term if investors begin to price recession risks and central bank rate cuts. After many years of strong equity performance relative to bonds, investors may have an opportunity to rebalance toward bonds, to bring allocations back in line with long-term plans, and to help manage potential equity risks. We like looking for opportunities in quality government bonds with short to medium maturities, especially in the US, Eurozone, and the UK. While Swiss government debt yields remain low and inflation muted, we still think some allocation to government debt can make sense for adverse economic scenarios, in which government debt tends to rally and yields fall in anticipation of monetary easing.
Build a resilient fixed income core
While we have an overall bias for quality, we do not exclude holding some exposure to higher-beta segments such as emerging markets (EM), high yield, or subordinated debt. Amid elevated geopolitical and sector-specific risks, investors should avoid overexposure to any single segment of the credit market. However, in the context of a well-diversified fixed income portfolio, an allocation to riskier credit can help improve overall returns.
EM bonds benefited from resilient global GDP growth and commodity strength—enhancing their role as a key portfolio allocation and alternative to developed market fiscal challenges. Additionally, many emerging markets have maintained restrictive monetary policy to ensure inflation credibility. This means real rates in the EM complex are high and should benefit from capital inflows looking for diversification away from traditional markets. Despite some expected spread widening, we believe elevated yields and supportive central banks underpin a positive outlook for EM debt, now rated Attractive, with continued outperformance versus cash expected.
Looking across asset classes, we believe equity income strategies and yield-generating structured investment strategies can also support diversified income.
