Fixed income Fixed income Turning positive? Three reasons to look 33 11 22 at fixed income again After many years of negative interest rates, yields on fixed income assets have finally turned positive. Charlotte Baenninger, Head of Fixed Income, discusses the benefits of positive yields currently available in fixed income markets. Charlotte Baenninger Head of Fixed Income`` Over the long-term, yield is by far the most Despite the large role yield plays in total return, it only stable and reliable component of total return contributes a minor proportion towards total return volatility. o say 2022 has been a difficult year for fixed In the UK, intermediate (7-10 year) gilts have been a significant for bonds Looking at Chart 3 – which simplistically displays yield and income investors is a gross understatement. underperformer, selling off by more than 260 bps to get to Over the past 20 years, yield (income) has been the price as a proportion of total return volatility – we can see that With central banks across developed economies a current yield level of 3.54%, while returning -16.9%. For 1 1 dominant driver of total returns in bond portfolios. while yield has contributed the most to total return over the Tresponding to inflation reaching 40-year highs, those investors who either track a benchmark or had a low For certain asset classes such as high yield and emerging past two decades, it has done so while contributing a lower bonds have repriced significantly, causing the largest flexibility tolerance and had to own negatively yielding bonds markets, price return has been negative over the long term yet percentage to the overall volatility. losses across the fixed income spectrum in many years. in markets such as Germany, they also felt a lot of pain. performance has been positive and very strong, demonstrating German intermediate government bond yields rose 235 bps to the power of yield (Chart 2). In the US, the yield curve has flattened substantially since +2.06%, resulting in a negative return exceeding 16%. the beginning of the year; almost the whole curve now exceeds 4% (Chart 1). The flip side to these market moves is that not only are the Chart 2: Fixed income sub asset class returns broken down Chart 3: Fixed income sub asset class volatility broken down by yields on offer in most fixed income sectors considerably by price and yield over the past 20 years price and yield over the past 20 years higher today than in the past, but the amount of negatively % % Chart 1: US yield curve flattens over 2022 yielding debt has all but evaporated. From a high of USD18 trillion 10 8 % at the end of 2020, now there is less than USD 2 trillion of 8 7 5 negative yielding debt outstanding. 6 6 5 4 With income finally back in fixed income, we outline 4 three factors for optimism: 4 2 3 3 1. Over the long-term, yield is by far the most stable and reliable component of total return for bonds. 0 2 2 2. Higher break-evens (from higher yields) act as “shock -2 1 absorbers”. -4 0 1 3. Investors no longer need to reach for yield by taking Bloomberg Bloomberg Bloomberg Bloomberg JPM EMBI Bloomberg Bloomberg Bloomberg Bloomberg Bloomberg JPM EMBI Bloomberg Global Global Gbl Agg Gbl Agg Global EuroDollar Global Global Gbl Agg Gbl Agg Global EuroDollar unnecessary credit risk. Aggregate High Yield 1-3 Yr Corp TR Diversified 1-3 Yr TR Aggregate High Yield 1-3 Yr Corp TR Diversified 1-3 Yr TR 0 TR USD TR USD TR USD USD TR USD USD TR USD TR USD TR USD USD TR USD USD 1M 3M 6M 1Y 2Y 3Y 5Y 7Y 10Y 20Y 30Y Yield Price Yield Price 31/12/21 10/11/2022 Source:Bloomberg, data period from 2 February to 31 October 2022. Source:Bloomberg, standard deviation data period from 2 February to Source: Bloomberg, as of 10 November 2022 Returns are gross of fees 31 October 2022 10 11