Central banks around the globe have taken an aggressive approach to contain inflation but this has resulted in weakness and volatility in key rates markets such as US Treasuries which have dragged corporate bonds lower. Vontobel says that the peak in 10-year US Treasury yields is close and stability in interest rates could allow bond investors to reap rewards.

The asset management firm says that the post-Covid economic cycle has moved unusually quickly, and global GDP growth is declining rapidly. The yield spreads of the US Treasury indicate a recession, while Europe is facing a winter of uncertain supply of gas. Herein, inflation is driving the market sentiment.

Meanwhile, central bank policies are impacting the performance of government bonds. “The longer inflation has stayed elevated, the more investors have repriced government bond yields higher to account for more aggressive rate hikes,” writes Eoin Walsh, Partner for Portfolio Management at TwentyFour Asset Management, a unit of Vontobel.

Historically, central bank policy was the source of stability for markets but in 2022 the tide has turned, and investors are fearful of rate hikes. While there is uncertainty over rate hikes, the investment management firm says the upper limit has been reached.

Vontobel says that patient fixed income investors are poised to get hefty returns. “We think the bonds with the best risk-reward profiles are at the shorter end of the (yield) curve,” says Walsh.

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