Market consensus is clear – bonds are back in 2023. Pictet Asset Management especially sees a good re-entry point in short-dated investment grade bonds. In a recent market analysis, the asset manager outlines why the tide finally seems to be turning for fixed income investors and the following opportunities.

Ermira Marika, Pictet’s Head of Developed Markets Credit, points out that the rate hikes by central banks and the resulting sell-off in global bonds have seen valuations return to attractive levels. “The aggregated Bloomberg Global Investment Grade Corporate Bond Index, for example, now yields over 5%, hitting levels not seen since the global financial crisis,” says Marika.

“Consequently,” Marika adds, “investment grade bonds have also once again become competitive on a relative value basis, offering income that exceeds the payouts from some of the world’s highest dividend-paying stocks.”

However, the market situation remains tense. Inflation could prevail for longer and the global economy is still relatively weak. This could put pressure on company fundamentals, “notably low-quality, CCC-rated high yield bonds.”

Under these market conditions, Pictet outlines where fixed income investors could go. “One area where yields offer superior compensation against risks is developed markets short-dated credit,” says Marika.

For shorter-maturity high yield credit the asset manager advises caution given the potential for economic distress. This suggests investors should focus on high quality bonds and more defensive industry sectors, as per Pictet.

Within investment grade credit, investors should avoid more cyclical sectors, such as retail. “Defensiveness and a focus on quality are key to navigating today’s environment,” Marika suggests.

Read the full insight here.