The Week: Bargain-hunting in bonds

After a lengthy period when bonds looked unappealing, current valuations should alert investors.

  • Bond fund managers point to compelling valuations after a repricing of corporate and government debt
  • With the economic climate weakening, central banks may pare back on rate rises
  • Investors are getting paid to wait in bond markets  

There is no shortage of top flight bond managers highlighting the bargains on offer in global bond markets. The worst start to the year for bond markets for over two hundred years has left valuations cheap, they suggest, and while there are undoubtedly tough economic times ahead, investors are more than compensated for the risks they’re taking. 

Ariel Bezalel, manager of the Jupiter Strategic Bond fund says: “Fixed income yields have become incredibly attractive – this is perhaps the best time to buy fixed income since the global financial crisis.” Mike Riddell, manager of the Allianz Strategic bond fund, said in a recent update: “We anticipate a significant bond rally on the back of inflation having likely peaked in most countries, and where it seems clear the global growth momentum should continue to drift lower, and potentially sharply lower.” 

The bond market has been repriced – and rightly so. The market needed to adjust to the new reality of weaker growth and the disruption of the war in Ukraine. Central banks across the world have been aggressive in raising rates to curb inflation, with consequences for economic recovery. However, there is a sense that this might have gone too far. Government bond yields have been dropping in the very short term, suggesting many believe that central banks may not raise rates as fast as they are saying. 

Spreads for corporate bonds have also widened considerably, leaving much more room for error. Investors are getting paid a reasonable coupon to wait and see whether risk assets stabilise. Certainly, investors still have to get through if not a recession, then a period of extremely sluggish growth. Defaults rates are likely to rise. However, with spreads at these levels, the risk of losing money looks far lower. 

There are nuances. The Financial Times recently pointed out that investors can buy Alphabet bonds for the same price as the debt of co-working group WeWork or car dealership Carvana (though the yield for the lower-rated companies is higher). This is a good moment for active security selection within credit markets. Good fund managers are likely to be leaning in to this new environment. 

It is an unfamiliar moment for bond markets – not only do they look good value, they also pay an appealing income. Investor sentiment may not change until inflation has reliably peaked and there may be options to get in more cheaply, but investors are being paid to wait.