Fixed income investors are finding opportunities in bond markets as higher yields, greater market dispersion and geopolitical uncertainty reshape portfolio construction, according to panellists at Bloomberg’s ETF-themed conference held in London yesterday.
The discussion had Marco Bontognali, deputy head of index fixed income portfolio management, UBS Asset Management; Rachel Baxter, head of European bond indexing, Vanguard and Raphael Stern, global head of fixed income PM, ETF & Indexed Investments, Invesco as panellists.
The panel highlighted the challenges facing investors, including large fiscal deficits, elevated government bond issuance, persistent inflation concerns, geopolitical tensions and uncertainty over central bank policy.
Bond markets are reflecting these risks, according to them, even as equity markets remain supported by enthusiasm around AI and technology-related growth.
Yields across fixed income markets have returned to levels that offer investors a source of income, making the asset class more attractive than it has been for much of the past decade. While credit spreads remain relatively tight, investors can still find opportunities in high-quality areas of the market, they shared.
The investment environment is changing from the era of quantitative easing, when asset classes often moved in tandem and liquidity supported broad market gains. As central banks take a less dominant role and market drivers become more diverse, investors are seeing more opportunities to benefit from relative value trades across regions, sectors and maturities.
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The cost of hedging US dollar exposure back into euros has increased, prompting some European investors to favour domestic fixed income opportunities over overseas alternatives.
Even passive fixed income investing involves active decisions, according to the panel, because bond indices contain thousands of securities that cannot be fully replicated. Decisions around sampling, duration, credit quality and regional exposure all influence portfolio outcomes.
Areas attracting interest were euro government bonds, floating-rate securities, AAA-rated collateralised loan obligations and target-maturity bond funds. Panellists also pointed to growing bond issuance from large technology companies funding AI-related investment, creating opportunities for investors seeking exposure to high-quality corporate credit.
ETFs have enhanced liquidity, transparency and price discovery in bond markets, particularly during market stress. Unlike individual bonds, ETFs allow investors to adjust broad fixed income exposures efficiently through a single trade, according to the panel.
Higher starting yields, diversification benefits and a wider range of ETF tools were cited as reasons investors remain constructive on the asset class despite a more volatile market backdrop.
