Having had a tricky time in the past few years, the uncertainty in markets has given fixed income investors a renewed appetite.
As an asset class, fixed income remains at the top of the agenda for investors, with figures from the Investment Association (IA) placing it as the best-selling asset class with net retail sales of £679m in April, compared with equity outflows of £635m.
With market concerns driving investors towards so-called ‘safe-haven’ bonds, the performance of these sectors has again been strong year to date to June 13 2016.
The IA Global Emerging Market Bond sector has proved the best performer with an average return of 11.3 per cent, just ahead of the IA Global Emerging Markets sector average of 8.3 per cent, data from FE Analytics shows.
Meanwhile, the IA UK Gilts sector has fared well with an average return of 8.1 per cent followed closely by the IA Global Bonds sector average of 7.8 per cent. In fact, compared with the main regional equity IA sectors of North America, Asia Pacific ex Japan, Global, Japan, UK All Companies, Europe ex UK and China, the bond sectors outperform all of them except Global Emerging Markets. A further exception is the IA Sterling Strategic Bond sector, which falls behind the IA Asia Pacific ex Japan and IA North America sectors.
But what lies ahead in the second half of the year?
Chris Iggo, chief investment officer, fixed income at Axa Investment Managers, says in his latest fixed income view: “For the moment, I am bullish on bonds despite the low yields. The fascinating thing about this job is that one can always find interesting opportunities. It is not a homogenous market as there are a range of risks coming from bonds of different maturities, from different countries and sectors, and of different credit quality.
“The key components are diversification and understanding of the interaction of interest rate, inflation and credit risk through the business cycle. It’s not just about allocating to different sectors, it’s about understanding the behaviour of different parts of the market. A 30-year Treasury might be ‘uber-safe’ from a credit point of view but that does not mean it won’t be volatile, just as a single-B rate high-yield bond might have a higher default rate but can deliver returns that are closer to equities.”
| Fixed income trends: The rise of green bonds |
A recent Bank of America Merrill Lynch Global Research report, ‘A Transforming World: Green Bonds,’ highlights the surge in supply and demand for green bonds, partly driven by China’s increasing presence on the scene. The report notes: “The green bonds market stood at $121bn [£83bn] as of April 30 2016, buoyed by $22bn of issuance year to date. Twenty-eight new issuers and two new countries came to the market, ranging from US technology titans (Apple) to Chinese banks (Shanghai Pudong Development Bank) to South Korean [car] original equipment manufacturers (Hyundai) to Swedish municipal lenders (Kommuninvest). Corporate issuance is the primary driver of growth, accounting for 58 per cent of all bonds year to date.” It adds: “2016 has been a transformational year for green bonds, marked by China’s astronomical rise to surpass the US and become the world’s largest issuer year to date. The People’s Bank of China’s publication of green financing standards in December 2015 catalysed $7.9bn of issuance from Chinese banks – Shanghai Pudong Development Bank, Industrial Bank and Bank of Qingdao. In our climate change report, we identified China as the world’s number one environmental investor – and China is targeting RMB300bn [$46bn] of green bond issuance this year, which could be vital to fulfilling the RMB2-4trn annual environmental investments needed for the country.” |
