Fixed Income

Better returns at reduced risk from bonds

bonds returns

The year ahead should provide investors with the opportunity to enjoy higher fixed income returns at a reduced level of risk.

A global wealth manager is expecting greater opportunities for investors to generate returns through fixed income markets after 2022 saw the rebuilding of yields from bonds and the credit risk premium.

Schroders portfolio manager Mik Kase noted this shift in market conditions will mean individuals will no longer have to accept significantly higher levels of risk to enjoy returns of around 5 per cent a year like they did last year.

“The positive of the reset we’ve seen is that investors are now able to access yield around 5 per cent in investment-grade markets,” Kase told attendees of a recent market update webinar.

“[If we] roll back a year, cash was giving [a return of] zero [and] you’d have to head into the really high-octane, high-yield emerging market debt to really generate some reasonable yield.

“Whereas now with Australian investment-grade [bonds] you can go out there and achieve close to a 5 per cent yield by buying high-quality, shorter-[term] investment-grade Australian corporate [bonds].

“For example at the moment I can buy a five-year [bond from an Australian] bank yielding 5 per cent, whereas if I roll back 12 months ago, I’d have to buy a high-yield [fixed income offering] which has lots of tail risk, high probability of default and volatility.”

According to Kase, one of the most significant advantages this situation will give investors is the ability to choose from a greater array of fixed income options when looking to manage the defensive income side of their portfolios.

He pointed out there will still be a substantial level of market volatility in the year ahead, but also that fixed income markets will be better equipped to manage these fluctuations.

“The rebuilding yield in those high-quality markets means that [bonds can] sustain more volatility and variability and still deliver income and positive returns to [investors],” he said.


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