For your eyes only: are bonds getting attractive again?
18 October 2022
After a brutal re-pricing in 2022, global bond prices are beginning to be considered enticing.
The global government bond benchmark now yields 3% after 1% at the start of the year, global investment grade yields 5% up from 2% and global high-yield is touching almost 10%.1
Looking back to another time of high inflation and low economic growth, the 1970s, the best performing US asset class excepting commodities and gold was, surprisingly, bonds. Indeed, bonds rose by more than 80% over the decade, easily outpacing stocks.
The 1970s Without Commodities and Gold
Past performance is not a reliable indicator for future performance.
With interest rates super low, a rise in rates can do a lot of damage to bond prices. That’s what’s happened so far in 2022, as central banks have lifted interest rates to stifle inflation. But once rates have already risen from low levels, subsequent increases are less dramatic. What’s more, if bonds are yielding 5-6% that has a tremendous compounding effect.
What’s more, the correction in global bond prices may be nearing its end. Inflation appears close to a peak in the US at least, broken by higher rates and escalating energy prices that are leading to the possibility of recession. If so, rates in the US should be close to a peak too. Obviously, this is only my personal estimate and cannot be guaranteed.
Based on all of this, I think bonds could be an attractive place to be, because the corollary of lower bond prices is higher income yields. While we don’t know how much damage may be done to companies and their bonds if there is a recession, I believe that corporate bonds have already priced in a lot of the potential bad news although obviously future performance cannot be guaranteed. It’s up to investors to allocate across fixed income, according to their individual risk appetites.
1 Source: ICE.
2 Past performance is not a guarantee of future results.
All data as of 11 October 2022.
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