Fixed-income markets around the globe have had a tough year, and high-yield bonds have also struggled, but Wellington Management believes 2023 could be a better year for the asset class given that investors exercise patience.

“I expect there to be no shortage of opportunities for investors to take advantage of high-yield market dislocations in 2023, particularly amid some of the macro risks I am watching — notably, tighter global monetary policies and debt sustainability concerns in Europe as borrowing costs rise,” writes Konstantin Leidman, Fixed Income Portfolio Manager, Wellington Management.

The investment management firm, in its 2023 Investment Outlook, says that global monetary policies are likely to remain restrictive to weaken consumer demand and reduce inflation. The primary concern is policy mistakes by one or more central banks.

Leidman expects macroeconomics to deteriorate further but does not see a deep global recession. “Rising input costs contribute to weaker corporate fundamentals, but they also lower the cost of debt in real terms over time,” as per the asset manager.

However, the recent sell-off in the high-yield bonds market and the lower dollar price may offer investors an attractive entry point for investors. Wellington advises being patient with increasing exposure to the asset class as there may be some volatility going forward.

Additionally, the investment management firm sees the best risk-to-reward offerings in additional tier 1 (AT1) bank securities, which are offering yields in the range of 8% to 10%. “Fundamentally, I believe the sector remains healthy overall. In addition, the risk of coupon deferral and/or principal loss appears remote, in my view, while extension risk — from the banks not exercising their call options — is already largely reflected in the securities’ prices,” says Leidman.

Wrapping up, Wellington Management says that while market volatility and more downside are expected, there will be market dislocations which investors can capitalize on. “Under such a scenario, an ensuing increase in market dispersion could create more investment opportunities for nimble, discerning active investors,” concludes Leidman.

View the complete outlook here.