Fixed income – IG Bonds a Good Option Amidst Volatility | Harris Fraser
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20 April, 2023
Fixed income – IG Bonds a Good Option Amidst Volatility

Markets worries over further rate hikes dissipated over the month as the banking sector turmoil continued to develop over the month, funds also flowed into fixed income market seeking safety. Over the month of March Bloomberg Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds gained 3.16%, 2.78%, 1.07%, and 1.24% respectively.

Although global inflationary stays elevated, market expects less rate hikes ahead, largely due to the chain of events nearly resulting in a financial crisis. To avoid contagion, central banks have been releasing extra liquidity to markets, just as banks tighten their credit facilities in response to the crisis. Overall financing conditions are expected to be tightening, and the fear impacting the sentiment and confidence would have a deflationary effect, inflation expectations are lower, further rate hikes might be limited from this point onwards, supporting bond prices as yields go lower.

Given the uncertainty in outlook on the global economy, rates, and inflation, alongside the higher geopolitical tensions, fixed income remains our preferred asset class. We are relatively neutral on duration, while overweighing credit quality. IGs benefit from the slowdown and recession fears, as well as the volatility in the market. Central Banks being close to the end of the rate hike cycle also offers more downside protection for the bonds. On the other hand, high yields are more affected by the economic conditions, and bond prices fall more in when spreads widen. All in all, we are bullish on investment grade bonds, while conservative on high yields.


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