The final two months of 2023 were among the strongest on record for global bonds. The catalysts were expectations of imminent global central bank easing combined with growth holding up quite well. The result was that all asset classes fundamentally repriced the investment outlook, and bonds were not left behind.
So far, 2024 has started pretty much the same way that 2023 finished. Animal spirits are alive and well, with new records almost daily in terms of bond supply and a market which is subsequently eager to absorb this new issuance. It is clear that investors have finally warmed up to bonds and are now allocating in size to it, after a near two-year pause.
We expect to see this trend continue well into the year. Granted, we are now off the recent highest point in bond yields, but long-term bond markets continue to look very attractive to us. Fixed income continues to offer the same fundamental, attractive characteristics versus most other asset classes. Investors can still pick up yield and move up the capital structure by simply re-allocating their portfolio to investment grade bonds from equity. They can build a true defensive income generating portfolio with bonds only, instead of chasing riskier alternatives with capital at risk. And they can also improve liquidity while picking up the yield on offer. For as long as at least two of these three characteristics remain in place, it is difficult to turn bearish on bonds.
For our strategic bond strategy, the recent change in Central Bank rhetoric means that while the market scenarios ahead remain binary, the distribution of the ‘tail risks' outcomes have narrowed. Overall, we are less bearish on growth and less worried about inflation compared to six months ago.
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