Interest rates and inflation have dominated investor conversations over the past few years, not least for their impact on fixed income markets. Investors have been caught off guard by inflation movements and GDP data, whilst views on the Monetary Policy Committee's (MPC) next move continue to be debated.
The debate has now come to a head, and Kris Atkinson and Shamil Gohil, managers of the £496m* Fidelity Short Dated Corporate Bond fund, are confident that rates have peaked as data trends downwards.
"We're now into a phase where we can say with a relatively high degree of confidence that we're past the peak in rates, and the next move is down," explains Atkinson, who notes the case for rate cuts is strengthened by inflation receding and growth stagnating.
A cushioned environment
According to the group's Global CIO for Fixed Income, Steve Ellis, one of the core reasons for why fixed income markets are so in vogue is due to ‘all-in' yields - a combination of core yields and the spread component - which are at very attractive levels in comparison to the past decade.
"Credit spreads are at very tight levels, in both US dollar and euro high yield and investment grade," explains Ellis. "But the reality is that the all-in yield is extremely enticing and so we are seeing investors taking comfort from the fact there is plenty of cushion in the sector - a lot has to go wrong (in terms of core yields moving higher or credit spreads widening) to see losses."
Post-recession positions
Against this backdrop, there is less of a need to invest in higher risk assets to secure a decent yield and the managers are focused on high-quality issuers, particularly in defensive areas which still offer opportunities for investors.
For example, looking across the fixed income market, sterling investment grade bonds are no longer historically cheap but compared to the high yield market are more attractive, says Gohil.
"If you look at the FTSE dividend yield at 4% and with global equities at all-time highs again, I know where I'd rather park my cash or invest moving into the late cycle recessionary environment. For me, it still feels like a good place to hide," he says.
Atkinson agrees whilst noting investment grade companies also remain "pretty resilient", with companies in this area generally large, diverse, and often multi-national. Within this sector the duo prefer the short-dated (sub-five year) part of the curve – namely because they can be more positively impacted by rate cuts as well as, in certain areas, offering higher yields for less risk given the inversion of the yield curve.
*Source: Fidelity International, as of 31 March 2024.
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Important information
This is for investment professionals only and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up so you may get back less than you invest. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be interpreted as a recommendation to buy or sell these securities and is only included for illustration purposes. The value of investments in overseas markets may be affected by changes in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. Rising interest rates may cause the value of your investment to fall. The price of bonds with a longer lifetime until maturity is generally more sensitive to interest rate movements than those with a shorter lifetime to maturity. The risk of default is based on the issuers ability to make interest payments and to repay the loan at maturity. Default risk may therefore vary between government issuers as well as between different corporate issuers. Sub-investment grade bonds are considered riskier bonds. They have an increased risk of default which could affect both income and the capital value of the fund investing in them. They can also use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations.
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