For your eyes only: are bonds getting attractive again?

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.

A range of bond yields to choose from

At VanEck, we offer a range of relatively inexpensive ETFs for investors to choose from. The most conservative is our VanEck iBoxx EUR Sovereign Capped AAA-AA ETF, which invests across some of Europe’s most creditworthy government bonds including France, Germany and the Netherlands. Yielding 2.14%, it is relatively low risk, even though some interest rate risk remains. The VanEck iBoxx EUR Sovereign Diversified 1-10 UCITS ETF takes a little more risk (both interest rate and credit risk), as it invests across 25 eurozone government bond markets. It is rewarded with a slightly higher 2.89% yield.

For investors choosing to take higher risk in return for higher rewards, the VanEck Global Fallen Angel High Yield Bond ETF invests in investment grade bonds that have been downgraded to high yield. In the past, this has proved an anomaly that has delivered outperformance². The ETF’s yield is 8.30%. Obviously, investors need to accept a relatively high risk level, notably credit risk and currency exchange risk. Alternatively, our EUR Corporate Bond ETF that only invests in investment grade corporate bonds offers a yield of 3.93%.

Turning to emerging markets, the Emerging Markets High Yield Bond ETF offers the highest yield and risk level of all, currently at 11.30%.

However, if you want to buy bonds (both sovereign and corporate) but keep some exposure to equities and real estate stocks, you can choose from the VanEck range of multi-asset ETFs. These are one-stop-shop solutions that provide the broad diversification across different types of investments that you normally only receive from high-end wealth managers. They are available for in three risk flavours: conservative, balanced and growth. Thanks to an annual rebalancing their composition remains in line with the chosen risk profile. The ETFs only invest in stocks and bonds that pass an ESG (environmental, social and governance) screening. Do note that these ETFs are also subject to risk, including interest rate risk and market risk.

2022 has been a painful year for all assets, including bonds. Indeed, levels of anxiety about investing are high. However, based on the experience of the 1970s, those people who are not, or hardly, invested in bonds, could reconsider their asset allocation.