Despite equity market volatility, the bond market has surprised many investors by offering strong performance over the past year. Core bonds returned between 8% and 9%, comparable to equity-like returns. According to Robert Mead, Co-Head of Asia-Pacific Portfolio Management at PIMCO, this is not surprising given the high starting yields. As trade policy fragmentation continues to drive market cycles, active investors can take advantage of these opportunities.
Mead notes that rates have moved significantly over a short period, with the 30-year bond yield in the US increasing from 1.5% to 5%. However, inflation appears to be under control, and we are moving into an easing cycle. While there has been debt, sustainability, and government bonds being issued as considerations, Mead believes these concerns are sustainable.
The concern of large deficits in a positive growth environment is more significant, as it means central banks must do the heavy lifting again. However, investors have not pivoted enough to take advantage of the repricing of yields. Instead, they should diversify into a range of different assets, including bonds and risky assets.
Mead encourages investors to consider changing global dynamics and link them to pricing. He suggests investing in areas with higher yields, such as emerging markets or sectors that are more resilient to trade policies. This approach can generate alpha well above the index for active managers and offers attractive returns in an environment where starting yields are high.
With inflation back within target ranges and correlations between equities and bonds low, investors need not fear a repeat of the breakdown of negative correlation seen in the pandemic era. The outlook for bonds is rosy, and this is a great opportunity to generate strong returns.
Source: https://www.livewiremarkets.com/wires/equity-like-returns-and-a-favourable-outlook-ahead-now-is-the-time-for-bonds