The large central banks are going to start lowering their intervention rates in 2024. Yes or yes. No investment firm doubts that the European Central Bank (ECB) and the United States Federal Reserve (Fed) are going to lower the price of money in the year that is now beginning. The only debate is when and for how much. Economies on both sides of the Atlantic are beginning to show signs of fatigue (especially in Europe) and there will be no choice but to promote less restrictive monetary policies. In fact, a dozen central banks from other economies in the world, mainly emerging ones, have already started down this path. The main consequence for bond investors is that sovereign debt will revalue with this movement. The further away the expiration date, the greater the increase.
It has been many years since there has been such a clear consensus among the different analysis houses on the star asset for the next year: fixed income. For some, the ideal is to still maintain a little commitment to bonuses with short durations; Others defend that it is possible to go to longer terms; most are betting on high-quality corporate debt… but they all see great potential in fixed income, which in many cases will allow them to recover lost levels in 2022.
Jim Leaviss, director of public fixed income investments at the British manager M&G Investments, is clear: “we believe that 2024 could offer opportunities for investors in sovereign debt and duration, as interest rates appear to have peaked and valuations are attractive.”
In Europe, many sovereign bonds are already paying coupons of around 4% and in the United States they exceed 5%. That income, called the carry In the jargon, it is almost guaranteed (barring default by the issuer, which is unlikely in top-quality sovereign debt). But, in addition, if rates drop by at least 100 basis points, as the analysis firms estimate, these bonds may have revaluations of between 8% and 10%, depending on the duration. The latent risk is that inflation is less controlled than is thought and there would be new rate increases, something that today seems remote.
Yoram Lustig, head of multi-asset solutions at T. Rowe Price, recalls that “central banks have credibility to defend and cannot run the risk of declaring the battle against inflation won and cutting interest rates too soon.”
Fund managers, especially those from banks, are making a killing selling fixed income funds. In 2022 and 2023, many fixed-income funds were sold to maturity, in which the firm buys a portfolio of bonds and waits for them to come to term. Benjamin Melman, investment director of Edmond de Rothschild AM, explains that “in 2024 this type of product will continue to be sold a lot, because it is the ideal time, since the possibilities of depreciation of fixed income are very low.”
Other funds that have worked best in 2023 are monetary ones. Banks have turned them into the alternative to deposits for which they did not want to pay high fees. But next year the situation will change.
Luis Artero, director of JP Private Banking in Spain, highlights that today one of the great dilemmas that his clients must face is the decrease in their exposure to cash. “During this year they have accumulated many positions in very short-term monetary and fixed income funds, because they really paid very attractive returns and it was very easy to leave the money there, but now they must be aware that there is an opportunity cost, because “There will be better returns in other assets.”
Beyond sovereign debt, analysis firms debate the convenience of also investing in company issues. Santander considers it to be a very attractive asset, but recommends its clients increase exposure to bond issues from companies with high credit quality. Juan de Dios Sánchez Roselly, investment director of Santander Private Banking, recalls that “if the economy slows down, without a recession, and there is a drop in interest rates, investing in good quality corporate debt offers a binomial of profitability. very attractive risk.”
The other fixed income asset that will enter many portfolios is the sovereign debt of emerging countries. Several central banks in Latin America and Asia have already begun to lower interest rates. In addition, the public accounts of many of these economies are healthy, which has protected them from the impact of the rate hike in the US. Matt Morgan, head of fixed income at Jupiter AM, believes that “it will be one of the star assets this year ” and Claudia Calich, manager of the M&G emerging bond fund, agrees with him, who believes that the outlook will be especially favorable “if the weakening of the dollar is confirmed.” Of course, all experts agree on betting on dollar emissions.
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