After years of extremely low interest rates, fixed income investments have become an attractive asset class again. Jeroen van Herwaarden, Portfolio Manager of Triodos Euro Bond Impact Fund, explains why it is a good time to invest in fixed income and how investing for positive environmental or social change may contribute to lowering credit risk.
When global inflation started rising strongly in 2022 after the COVID-induced lockdowns, central banks were initially convinced this rise would be transitory in nature. When it became clear the rise was much more prolonged, with the war in Ukraine and second-round effects like wage increases leading to extra price pressures, global central banks embarked on an unprecedented monetary tightening path. The subsequent rate hikes pushed up both short- and long-term interest rates to their highest levels in a decade.
Yield-to-maturity on balanced investment-grade portfolio now above 3%
Now that the peak in inflation is behind us and, after two years of unprecedented tightening, most central banks have reached the end of the rate hike cycle, the smoke seems to have cleared. Inflation has been falling last year and can be expected to fall further towards the central banks’ target of around 2 percent. As a result, financial markets expect central banks to start cutting interest rates in the first half of this year. All things equal, euro-based bond investors are now rewarded a decent annual return of more than 3% on a balanced portfolio of investment-grade bonds with an average duration of five years. This return does not only compare attractively to cash returns like the interest on a savings account, but it also provides bond investors with a buffer against adverse interest rate developments going forward. An additional advantage of these higher interest rates is that bond investments may increasingly start taking on their traditional role in a balanced investment portfolio again: to provide protection in periods of unfavourable equity performance.
Possible additional return to bond holders on top of attractive interest rates
If inflation keeps falling and economic activity slows down further over the following months, bond holders may expect an extra return from declining long-term yields. In addition, if the main central banks indeed cut rates this year by the currently expected magnitude or more, falling short-term interest rates may further add to bond investors’ total returns. But even if current inflation proves sticky and rate cuts occur later than expected, bond investors can still make a solid return based on the current yield levels.
Deteriorating company fundamentals ask for defensive positioning
We expect credit spreads to widen in the first half of this year, as tighter monetary conditions will start hurting the profitability of debt-heavy companies. The expected environment of weakening company fundamentals and rising default rates asks for a defensive positioning in terms of credit risk. As a result of our prudent investment policy and the defensive positioning of the Triodos fixed income investment portfolios, credit risk is considerably lower in our funds compared to the reference index.
Impact strategy accounts for fully impact-related profile and lower credit risk
We invest for positive change, alongside a financial risk and return that are in line with the broader market. Inherent to our impact strategy, selected issuers have, besides generating positive impact, considerably lower sustainability risks compared to the overall market. In addition, we invest to a large extent in ‘use-of-proceeds bonds’, a type of impact bonds of which the proceeds are earmarked to finance eligible environmental and/or social projects. Use-of-proceeds bonds are a strong instrument to steer the investments towards more positive impact. The issuer of the bond, moreover, is obliged to report on the impact results. Impact bonds have therefore become an important asset in our bond portfolios, currently accounting for two thirds of our euro-denominated fixed income investments. The market for impact bonds has become more mature over the past years, with more and more corporate issuers entering the market. But as the market for impact bonds still consists to a large extend of green- and social bonds issued by large government-related issuers, our fixed income portfolios have by nature of their impact strategy a large allocation to higher-quality impact bonds, which means a lower exposure to spread volatility.
In conclusion: attractive yield and resilience
In current market circ*mstances, with higher bond yields, fixed income investments have become an attractive asset class again from a risk-return perspective. Apart from the attractive yield, bonds also offer resilience for adverse market developments in risk assets like equities. Impact bonds add additional value by generating positive impact and contributing to lowering overall credit risk through the higher average quality of the issuers.
In current market circ*mstances, with higher bond yields, fixed income investments have become an attractive asset class again from a risk-return perspective. Apart from the attractive yield, bonds also offer resilience for adverse market developments in risk assets like equities.
Given where we are now (i.e., post-Covid, falling inflation, higher rates, restoration of bonds' diversification benefits), we believe that the case for fixed-income is very strong. Although cash rates are currently attractive, investment-grade credit yields are currently offering outperformance.
Stock prices have surged significantly over the past 18 months. The S&P 500 is up by 45% since it bottomed out in October 2022, while the tech-heavy Nasdaq has soared by a whopping 58% in that time. Investing now, then, means paying much higher prices than you would if you'd bought a year or two ago.
With interest rates as high as they've been for 16 years, but with many experts predicting they may fall in the coming months, it could be a good time to take advantage of fixed-rate bonds.
There are indications that interest rates may start to fall in the near future, with widespread anticipation for multiple interest rate cuts in 2024. Falling rates offer the potential for capital appreciation and increased diversification benefits for bond investors.
In current market circ*mstances, with higher bond yields, fixed income investments have become an attractive asset class again from a risk-return perspective. Apart from the attractive yield, bonds also offer resilience for adverse market developments in risk assets like equities.
Right now, the 3-month Treasury bill rate is 5.25% while the 30-year Treasury rate is 4.58%. So, if you're looking for a risk-free way to earn interest on your cash over a short period of time, investing in a T-bill could be a good choice.
The S&P 500 generated an impressive 26.29% total return in 2023, rebounding from an 18.11% setback in 2022. Heading into 2024, investors are optimistic the same macroeconomic tailwinds that fueled the stock market's 2023 rally will propel the S&P 500 to new all-time highs in 2024.
There is no better time to start investing. It is very difficult to time the markets and although the markets are due for a correction, it would not be wise to wait further. Also, when it comes to SIPs, there is not much merit in timing the markets. We would suggest you invest in different mutual fund categories.
With all these factors taken into consideration, the best time of day to trade is 9:30 to 10:30 am. The stock market opens for trading at 9:15 AM and in the first 15 minutes, the market is still responding to the previous day's news with experienced traders waiting to make their move.
7% Interest Savings Accounts: What You Need To Know
As of June 2024, no banks are offering 7% interest rates on savings accounts.
Two credit unions have high-interest checking accounts: Landmark Credit Union Premium Checking with 7.50% APY and OnPath Credit Union High Yield Checking with 7.00% APY.
Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.
After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
Remember, when you cash out your I Bonds you don't earn the interest until you complete the month and that you lose the prior 3 months' interest. If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and.
The top picks for 2024, chosen for their stability, income potential and expert management, include Dodge & Cox Income Fund (DODIX), iShares Core U.S. Aggregate Bond ETF (AGG), Vanguard Total Bond Market ETF (BND), Pimco Long Duration Total Return (PLRIX), and American Funds Bond Fund of America (ABNFX).
In general, prices rise as yields fall in fixed income. So, investing in higher-yielding fixed income today could capture yield with the potential for positive price performance should market yields continue to fall, tracking cash investment yields lower along with Fed rate cuts.
Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions. During economic downturns, fixed income has been shown to provide diversification benefits and reduce the volatility of portfolios that include risk assets such as equities.
The underlying growth outlook remains healthy thanks to strong consumer balance sheets and solid levels of business investment. This combination should keep corporate defaults low. Risk premiums may widen further, with entry points for taxable fixed income likely to become more attractive over the coming quarters.
Like most other fixed income investments, municipal bond yields have risen significantly since late 2021 and are now at levels that largely haven't been reached during the past decade.
Introduction: My name is Corie Satterfield, I am a fancy, perfect, spotless, quaint, fantastic, funny, lucky person who loves writing and wants to share my knowledge and understanding with you.
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