The scenario for fixed income investing is changing, and it is likely to be a rewarding year for bond investors, says Pictet Asset Management. However, the asset manager points out that the situation is different from that of the past and investors need to adopt a strategic approach.

“With bond yields higher than they have been for many years, investors no longer need to seek out quality stocks in order to generate a return – as they did during the long years of official zero interest rate policy. The bond and credit markets can once again be relied for significant income, which, in turn, gives a buffer against volatility,” Mary-Therese Barton, Chief Investment Officer of Fixed Income at Pictet explains.

Also, yield won’t be the only source of income from these instruments, as there would be enough scope for capital appreciation, as per Pictet. However, Barton advised, “….a likely rise in market volatility will necessitate a careful and active fixed income investment approach. As a result, smart investors should be able to generate high single digit returns from fixed income for years to come.

Pictet further mentioned that the barbell approach of 2023 would no longer be applicable this year. The barbell approach is wheninvestors take large positions in money market instruments to capitalise on low-risk yields while also allocating budgets to high-yield but illiquid instruments like private credit.

However, with the plateauing of rates across central banks of developed economies, the situation is poised for a change. “….the most attractive opportunities are spread right across the risk spectrum: in credit, sovereigns and, not least, emerging markets, as well as in money markets and private markets”, clarifies Barton.

According to Pictet, Emerging Market (EM) bonds are more promising this year than in 2023. The asset manager states that the notion of developed markets offering stability and emerging markets leading to volatility is set to break and favour EM fixed income investing.

Barton elucidates, “…So where developed market central banks are still waiting to ease, monetary policy has loosened across EM economies. This, together with increasing domestic investment appetite, has made EM local debt increasingly attractive.”

Last year, due to a lack of dispersion and yield in fixed income investing, passive index-based products became popular. But now higher yields and major market dispersion would favour an active investment approach. 

“It’s a new world for investors, one of considerably more volatile inflation and therefore of more volatile interest rates,” concludes Pictet’s Fixed Income Chief Investment Officer.

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