T. Rowe Price's Ritu Vohora: Rethinking fixed income

investmentweek.co.uk:

Ritu Vohora of T. Rowe Price

After a decade of ultra-loose monetary conditions that suppressed yields and reduced the effectiveness of bonds to diversify portfolios — the case for fixed income assets seems to be ironclad. Rising interest rates have boosted the income they offer with yields in many sectors at multi-year highs.

Take high yield debt, for example. With global and European high yield debt yields near decade-highs, they represent good value for investors to lock in an attractive yield. History shows investors with a one- to- two-year time horizon can reasonably expect to earn double digits returns if they invest at current levels.

However, climbing bond yields are set against a backdrop of storm clouds darkening the economic landscape.

Inflows into trackers double in August as fixed income funds revert to outflows

Manufacturing surveys across the world are mired in recessionary territory while services, one of the few bright spots in the global economy, is losing momentum as consumer balance sheets start to feel the heat from the lagged effects of the aggressive monetary policy tightening campaigns by major central banks. Even China's much-awaited post-Covid economic recovery has fizzled.

Furthermore, central banks are straying into the realm of policy errors in their quest to quell inflation, as restrictive monetary policies threaten to tip their economies into recession. Meanwhile, the removal of liquidity from the global financial system, that caused turbulence in UK pension funds and US regional banks, could unearth further shaky debt structures and hidden leverage in obscure corners of the market.

While storm clouds may be rolling in, not all boats will sink, and those with ballast can provide shelter