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Athlos Capital: Short-term government, corporate and financial bonds the best options for 2023

Sara Eojourian, Head of Wealth Management at Athlos Capital, talks about how central bank policy in the US and Europe has impacted investors’ portfolios, while underlining the fact that opportunities and gains are still there for the taking.

In 2022, the US bond market turned in its worst-ever performance. What was behind this?

Last year was indeed the worst on record for the bond market. The Total Bond Index, which tracks US investment grade corporate and government bonds, lost more than 13%. Prior to last year, the worst performance recorded was back in 1980, when the index lost 9.2%. In 2022 US inflation reached its highest level in over four decades (9.1%), forcing the Federal Reserve System (Fed) to aggressively raise its main interest rates to bring inflation down. As a result, last year, we experienced some of the fastest rate hikes in history, which have negatively affected bond prices. The Fed is determined to reduce inflation to its medium-term target of approximately 2%, despite rising recession risks. It enacted its seventh consecutive rate hike on 14 December 2022, bringing its benchmark rate to 4.25%-4.50% while, at the same time, shrinking its balance sheet.

How would you describe the investment outlook for bonds in 2023?

Global inflation probably peaked in 2022 and we expect it to continue a downward trend and the economy to slow down as a result of tighter monetary policy. The inverted US yield curve signals a recession as labour and living costs can keep monetary policy tighter for a longer time, which would push the US economy into a recession. The Eurozone is also expected to experience a recession because of the Russia/Ukraine war and increasing energy prices. Energy prices were expected to have a much greater effect on the recession but the warmer winter weather means that gas prices remain lower and Europe may avoid the worst-case recession scenarios. The market consensus is that the Fed and the European Central Bank (ECB) will continue to increase their interest rates in the coming months. Specifically, the Fed is expected to increase its benchmark rate to 4.90% by June (from 4.33% today) and the ECB to increase its main interest rate to 3.40% by July (from 2.00% today). As a result of the Fed and ECB hikes, bond yields have increased significantly. As the pace of interest rate hikes starts to decline and inflation normalises in 2023, we believe that fixed income will resurface as a more attractive asset class, compared to 2022, which will help diversify and stabilise returns on investors’ portfolios whilst offering higher yields. It is expected that the uncertainty and volatility of the market will present opportunities and investors will need an active allocation of their investments, to match the ever-changing macroeconomic environment. Active management can offer investors higher yields in 2023, alongside better management of their cash flow and liquidity needs.

What kind of bonds are of most interest to investors?

Investors select different types of bonds based on their profile, knowledge and risk appetite. Most investors have shown a substantial interest in active liquidity management through short-term (less than one year) European and US government T-bills and sovereign bonds. Investment in these short-term bills has enabled investors to have a more efficient utilisation of their cash reserves and get higher returns than commercial bank deposits, while at the same time, in many cases, moving up in credit quality (i.e. lower risk). Investing in Eurozone country T-bills and US T-bills results in a better geographical and sectoral diversification of any portfolio, while providing daily liquidity. Professional investors have also shown interest in high-quality financial senior bonds as they offer attractive yields.

Can you suggest specific bonds that you believe will perform best in 2023?

We consider short-term government bonds and short-term investment grade corporate and financial bonds to be the best options for 2023 as long-term government bonds with long duration bear a risk due to the uncertainty over the pace of future interest rate hikes. We are positive on the following sectors and tenors considering increased recession and inflation risk: US and European Treasury bills and sovereign bonds, carefully selected short-term corporate and financial investment grade bonds.

The above is intended for information purposes only. Under no circumstances is it to be used/considered as an offer to sell/buy any security.

Investors should seek independent financial and tax advice before proceeding to purchase/sell any security.

(This interview first appeared in the February 2023 issue of GOLD magazine. Click here to view it.)

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