"In recent years, there was nothing to be gained from traditional fixed income. Conventional bonds were essentially a zero-yield risk in the portfolio. However, after the historic sell-off in bonds in 2022, fixed income, long spurned, is once again offering attractive returns. The motto ‘TINA – there is no alternative to equity’ no longer applies. In the context of asset class allocation, ‘BOB – bring on bonds’ is the new maxim.
In our fixed income allocation, we continue to focus on high-quality investment grade issuers with robust cash flows and credit fundamentals. The broad European investment grade corporate bond market is currently yielding an attractive 4.0%.
The focus on solid investment grade companies is particularly important in the current environment, as we believe high-yield spreads are too low given the existing recession risks. Depending on the severity of the economic downturn, default rates in the junk bond segment could rise abruptly. In addition, we do not recommend adding unnecessary interest rate risk to the portfolio as volatility in the interest rate markets remains elevated. The recent easing of expected interest rates is, in our view, a bit too optimistic on the part of the market.
From a pure risk/return perspective, we prefer hybrid bonds issued by high-quality companies with short duration. In this area, an investment grade portfolio yields 7-8% per year in euros. Since the beginning of the year, the hybrid market has rallied, driven by new issues from names such as Enel, Iberdrola and EDF. Some of these issues have been oversubscribed by more than seven times in the primary market, underlining the current demand for such issues."
