Investors reliant on fixed income and seeking higher rates of return should consider broadening their exposure to the asset class and moving higher up the risk curve to offset the current low yield from bonds, according to a global investment manager.
Schroder Investment Management deputy head of fixed income Stuart Dear said bond yields were likely to remain soft as that would help drive the economic recovery following COVID-19-induced market downfalls and investors would have to look to the wider fixed income universe for returns.
“Cash rates are at zero and term deposits available for retail investors are also very close to zero, so there is a temptation to put money under the mattress,” Dear said.
“But the problem is not just in cash, it’s more broadly in fixed income. In the global fixed income universe, only 29 per cent of that universe is yielding greater than 1 per cent.”
He said the percentage of the global fixed income market yielding less than zero had not changed, but higher yielding markets, including the United States, had been pulled down to below 1 per cent in the government bond space.
As a result of this shift, Dear recommended investors consider looking beyond Australian and overseas government bonds into other fixed income offerings.
“Government yields – whether Australia or globally – are sub-1 per cent at the moment, but there is no need to take on too much extra risk to step out into the investment-grade space and earn about 2 per cent, and then there are further opportunities up the risk curve you can earn about 5 per cent in higher-yielding assets,” Dear explained.
Fixed income sectors returning more than 2.5 per cent included European and Asian credit, emerging market bonds and global high yield, and it was important not to limit fixed income investments to only one sector, he noted.
“The key point is to make use of the breadth of fixed income. While on aggregate yields are low, there’s opportunity to access yield and to improve diversification in a portfolio by using different assets across the spectrum. There is yield out there and a well-managed fixed income portfolio should make use of that,” he said.''