Chris Iggo, CIO of AXA Investment Managers Core Investments still sees little leeway for fixed income securities and believes persistently low yield levels are the most likely. He analyzes where potential and diversification with bonds can still be found in 2021.
“Bond strategies are currently characterized by low yields and credit spreads at pre-crisis levels. However, higher bond yields are unlikely in 2021 either. Investors should question whether higher long-term real returns without inflation are a sustainable scenario for central banks. Even in a more positive economic environment, markets begin to “taper” in monetary support. In such a scenario, returns could be negative. This would have an impact on bond and equity returns – comparable to 2018. Bond investors should therefore keep an eye on growth and inflation expectations in addition to monetary policy.
In 2021, an investment environment comparable to the last financial crisis is realistic. Back then, credit-intensive forms of investment performed comparatively well. Emerging market bonds, high yield bonds, and credit could still be attractive to investors looking for yield in 2021. High yield bonds and loans offer greater protection against an upward shift in risk-free rates, and credit concerns should ease as they recover.
In addition, the question arises whether fixed-income securities can continue to function as a hedge against high-risk investments. This has been a useful feature of fixed income investments in the past. Traditionally, fluctuations in a portfolio can be diversified. Riskier assets, such as stocks, can be combined with lower risk assets such as government bonds. The interest rates are currently in the lower range and have only limited scope. This makes it more difficult to combine asset classes that develop differently in changing market phases. The development of US stocks compared to government bonds and between US corporate bonds compared to government bonds show this very clearly since the coronavirus shock in March. In such an environment, supposedly safe currencies such as the Swiss franc and the Japanese yen could be the better hedging option to manage the downside risk of the portfolio. ”
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With Hans-Werner Sinn, former President of the Ifo Institute: Corona and the miraculous increase in money in Europe
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