Where fixed income investors should look in vulnerable market

The current backdrop for fixed income markets looks particularly supportive and favours further yield compression and outperformance by corporate and emerging market bonds.

Not only is growth accelerating, but inflationary pressures are limited thanks to the significant economic slack created by the recession. As a result, policymakers are free to continue to support the recovery with cheap money. With short-term interest rates being held close to zero, investors are being encouraged to reallocate savings away from cash into bonds and other assets. This is fairly normal at this stage of the cycle, but the resultant downward pressure on yields is being compounded by a rapid fall in private-sector borrowing and central bank debt purchases. This process can...