Bonds have traditionally been seen as a steady source of income for investors, but fixed income was anything but predictable in 2022. Fixed income experts at Franklin Templeton and its specialist investment managers discuss whether 2023 will be bonds comeback year.

As yields reach new heights, Tracey Chen, portfolio manager at Brandywine Global, a specialist investment manager of Franklin Templeton, highlighted at a webinar this week that bonds will provide a safe haven in volatile markets for investors this year. 

“Before the Covid pandemic happened, we thought the bond yields would be lower for longer due to the 3 'd' forces in the deflationary world – debt, demographics, digitalisation. However, we are witnessing a regime change post-Covid. We have seen massive stimulus during Covid, a war going on, deglobalisation,” she said. 

“Last year was the worst time for bond markets for 200 years,” she continued. Stubbornly high inflation drove central banks into a sudden and rapid hiking cycle. This brought uncertainty and weakness across asset classes as the traditional diversifying correlation of stocks and bonds broke down, presenting an additional challenge for investors. However, the positive outcome of an historically brutal fixed income bear market is that yields are now at heights unseen in many years. 

“Bonds look more attractive this year,” Philadelphia-based Chen said. “Bonds provide a safe haven for investors' portfolios. The timeline for recession has been brought forward by the banking stress. From an income perspective, bonds offer great value now. I favour the front end. I think 2023 will be a good year for the bond market,” she continued. 

In particular, Chen favours emerging market bonds, saying it’s a “goldilocks” situation for these countries.

The comments come after a period in which the old "60/40" portfolio model (60 per cent equities, and 40 per cent bonds) had been dismissed as out of date after more than a decade of ultra-low official interest rates, low bond yields and an exodus to areas such as private markets. However, the rise in interest rates last year, continuing into 2023, has made some parts of the fixed income market look more attractive again. It has also, as seen in the collapse of Silicon Valley Bank, put pressure on parts of the financial system.
 

The time is right
London-based Annabel Rudebeck, head of non-US corporates, Western Asset Management Company also believes that it’s a particularly attractive time to enter the global credit market. “The yields in the corporate credit market are around 5 per cent which is very attractive,” she said.

Jennifer Johnston, director of research, Franklin Templeton municipal bonds in California, said it will be a good year for municipal bonds too. “It is a far higher quality market. We generally see stronger credit fundamentals in our market and think it’s a good place to be,” she added. 

The recent US banking sector troubles, following the collapse of Silicon Valley Bank, haven’t had much impact for the moment on the municipal bonds market, she continued. She also doesn’t expect long-term pressure on public sector pensions. But she will be watching the market closely, as banks are large owners of municipal bonds. Chen also believes that there could be a credit crunch if the situation is not managed well, as banks provide a lot of loans. 

The all-female panel at the webinar also marked a tribute to International Womens Day, which took place earlier this month.