The past two years have been exceptionally challenging for fixed income investors. Spiralling inflation led to one of the most aggressive rate-hiking cycles on record, however, we believe the market for bonds is now looking much healthier.
But, while bonds are once again finding their form, investors have found themselves sitting on cash balances of 30% to 50%. This capital preservation trade has made perfect sense, but does it still make sense as we reach terminal rates? The opportunity cost right now of having no duration, and therefore no chance of future capital gains, could be doing a disservice to clients.
Some corners of the bond market look more appealing than others, with short-duration bonds proving particularly compelling. One of the main drivers of this is that yield curves remain inverted. In normal market conditions, yields for longer-dated bonds are higher than shorter-dated ones. But in current market conditions this appears to not be the case, with the yields on one-year bonds higher than those with maturities of 10 or 30 years.
Read more below on why we believe the time is right for fixed income and why short-dated bonds, in particular, could be the answer to the cash dilemma.