Never Say Never Again: Bonds Are Back?
11 July 2024
It was well timed. To use a superhero metaphor, inflation is “kryptonite” for bonds – it reduces the purchasing power of the earned interest. This is why 2022’s spike in inflation drove bond prices lower. Equally, when inflation fades bond prices tend to rally and that’s happened since my 2022 column.
Fixed Income ETF Performance (Rebased as of 30 Oct 2022)
Source: VanEck. Monthly Returns in EUR. Past performance is not a guarantee of future returns. Investing is subject to risks.
Could this signal that the bonds are back in town, as is their place in an investor’s balanced portfolio? With income yields far higher than they were during the years of low interest rates ahead of 2022, bonds may offer an effective way of income investing again. They also have the potential to cushion a balanced portfolio of equities against rocky markets.In the UK and Italy, 10-year government bonds once again pay a significant positive yield accounted for inflation (known as a “real yield”, see chart). In other markets like France and Germany, government bond yields have also inched into the positive territory.
10-Year Real Yields Moving Into Positive Territory
Source: Bloomberg.
Potential Price Rises and Attractive Yields
After this price recovery what happens now? If inflation falls further—as is hoped for in Europe, the UK and US—then bond prices should rally even further than they already have.
What’s certain, though, is that bonds currently pay attractive yields1. For instance, VanEck’s iBoxx EUR Corporates UCITS ETF yields over 3.5% at the time of writing, while the iBoxx EUR Sovereign Diversified 1-10 UCITS ETF, investing in government bonds, pays a somewhat lower 2.85%. Investors willing to take more risk for a higher potential return could also be interested in high yield strategies that traditionally display higher yields. Investors should nevertheless keep in mind that investing in fixed income ETFs is subject to certain risks such as credit risk, interest rate risk and liquidity risk.
Balanced Portfolios for Everyone
More fundamentally, though, bonds normally have an effective role to play as stabilisers in investment portfolios. [Our range of multi-asset ETFs are a one-stop-shop for every aspiring multi-asset investor at a cost of just a few dozen basis points.]
One can build such a balanced portfolio yourself using ETFs, tailored to risk preferences by increasing or decreasing the relative weightings of shares and bonds. Low correlation between equities and bonds could also be an ally in a quest to diversify the returns, however one should not forget that it tends to spike during times of economic uncertainty.
1-Year Volatility
Source: Morningstar. Data in USD, Net Return. Global Equities represented by the MSCI World index, Global Bonds by the Bloomberg Global Aggregate index. Past performance is not an indicator of future returns. You cannot invest in an index.
For a while the 2022 bond market correction shook faith in the traditional portfolio allocation theory that recommends a balanced equity-bond portfolio for certain investor types. Yet as real yields move back into positive territory, so confidence is returning.
Currently, the bond yields could be considered attractive and would be even more so if inflation and interest rates fall further. This could prompt another look by a wise investor looking to enhance their core portfolio.
IMPORTANT INFORMATION
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions. This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
VanEck Asset Management B.V., the management company of VanEck iBoxx EUR Corporates UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a bond index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of iBoxx EUR Sovereign Diversified 1-10 UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a bond index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
VanEck Asset Management B.V., the management company of VanEck iBoxx EUR Sovereign Capped AAA-AA 1-5 UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM, passively managed and tracks a bond index. Investing in the ETF should be interpreted as acquiring shares of the ETF and not the underlying assets.
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© VanEck (Europe) GmbH
Important Disclosure
This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.
This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).
The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
© VanEck (Europe) GmbH / VanEck Asset Management B.V.
