Interest rates are rising across the globe to curb inflation, and so are the real yields of fixed-income assets. Pictet Asset Management observes that it has been over a decade since the prices of bonds were at such an attractive level. For instance, from a negative real yield of 2% in the UK, the rate has turned into a positive 2% in the past couple of months. Long-term investors can look into this, especially when there are so many geopolitical and macroeconomic uncertainties around the globe.

That said, investors need also be cautious as rate increases might persist for longer than anticipated. Central banks may maintain higher rates before scaling back inflation control measures. “This suggests an increasing tilt towards erring on the side of excessive tightening rather than watering down policy measures before they’ve fully subdued inflation,” writes Raymond Sagayam, CIO – Fixed Income at Pictet AM.

Whatever the case may be, bonds with longer tenure may give good returns. “Today, longer-dated bond yields are attractive but volatility means investing in such securities is a potential hazard. So short-duration, high-quality bonds are our preference for now. Even corporate bonds with short maturities are offering attractive opportunities for investors – risks (like a sudden economic slowdown) are being balanced by unusually attractive rewards over this very short time horizon,” Sagayan cautions.

Another interesting factor pointed out by the asset manager is that the UK government has been struggling to stabilise the yields of sovereign fixed income assets. In contrast, the US government is faring well as stagflation is yet to hit US shores. “Complicating the picture is central banks’ fear of causing an accident,” as per Pictet AM

The investment management firm observes that rising rates and cooling inflation generally historically have had a positive impact on sovereign fixed income assets.

Pictet’s Sagayam also points out the vulnerability in the equity market due to rising costs, inflation, lag in production, and energy issues and thus investors can look for opportunities in the corporate bond market along with sovereign bonds.

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