Rampant inflation has presented a material challenge for investors, but its legacy has left a compelling opportunity for everyone. Can bonds compete with equities when it comes to yield? Find out now with Deputy Head of Sterling Investment Grade & Aggregate Roger Webb.
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While global inflation issues haven’t been fully tamed, their impact has been felt across asset classes. Rampant inflation has presented a material challenge for investors, but its legacy has left a compelling opportunity for everyone. While government bond yields have fallen back from their peaks, they are still at levels significantly above those seen in the last 10 years. As a result, bonds can finally compete with equities as a yield-generating asset class.
With investment grade credit in the UK and US offering well over 5% and high-yield markets giving us more than 7% these more traditional income-generating assets are back in play. It’s clear to us that while other assets offer both income and the scope for capital gains, bonds can now take their rightful place in diversified portfolios, currently offering a lower-risk source of income.
That’s not to say that bonds don’t have risk, but the yields available provide a decent amount of comfort, and the potential for inflation-beating returns. In an uncertain world, we think that bonds have a more valuable place in portfolios than they have had for some time.
The enormous bond universe offers something for everyone, and each part of that universe can form part of diversified portfolios. High-yield corporates for instance, can offer yields approaching 8% and, while that market comes with risks if the global economy slows, for example, it also offers a scope for capital appreciation if the situation continues to improve.
At the other end of the spectrum, government bonds can, once again, offer stability in a diversified portfolio of risky assets. The risk to this asset class primarily comes from the best possible economic outcome where growth picks up and inflation comes back. This is likely to help those riskier asset classes.
Investment grade credit should offer a little bit of both. Their yield being made up of a combination of underlying government bond yields and credit premiums, also known as spreads. A negative economic outcome may cause those spreads to rise but would force yields lower. While a positive one may push up yields but keep a lid on those spreads.
Ultimately the key issue today is that bonds of all shapes and sizes are back in vogue. Yields are competitive and relatively attractive; markets are liquid and accessible, and volatility is likely to be materially lower than in equities.
At abrdn, we have a range of specialist teams managing portfolios across all areas of fixed income. Please visit our website to view the full suite of products on offer.