SINGAPORE – Inflation fears have opened up huge opportunities in the bond space for fixed-income investors, with yields, particularly in American dollar-denominated credit, at historical highs.
Mr Navin Saigal, head of Asia macro for fundamental fixed income at BlackRock, said that for the first time in recent memory, investors had the opportunity to lock in high yields on three- to five-year credit, which could be above those for 30-year credit.
“The opportunity is set for unique and incredible return for fixed-income investment without taking on volatility,” he said. “Bond investors are looking at yields of between 6 per cent and 7 per cent on a diversified portfolio of high quality bonds. This is an opportunity that has not existed for some 16 years.”
Triggered by high policy rates, US households had stashed about US$18 trillion (S$24.5 trillion) in cash in their balance sheets as at last September, Federal Reserve data showed.
Mr Saigal said while a handsome yield of 5.3 per cent amid a high interest rate environment in the US has been a strong incentive to keep cash in money market funds, investors face the challenge of rates starting to decline. “The single biggest risk is that of holding too much cash as the cash market yields start falling as the easing cycle kicks in,” he added.
He advises locking in bond investment for up to five years: “Beyond that, duration risk kicks in.”
While Mr Saigal is primarily upbeat on US dollar-denominated bonds, he is also positive on high-yield euro bonds, and Japanese and Asian credit. “Asian credit has become a very interesting asset class, particularly in the context of a diversified portfolio,” he said.
While US stock-bond correlation (between risk-free and risky assets) has risen to decade highs, the correlation between US and Asian emerging market bonds hovers around zero, suggesting Asian fixed income is a good diversifier for a global portfolio, BlackRock noted.
Mr Saigal reckons the chance to lock in historically elevated nominal and real yields may not last forever. “As wise as holding cash was through 2022 and much of 2023, we believe it is time to start deploying that cash before future events, such as a rate-cutting cycle or the US presidential election in November, materially shrink the opportunity set,” he noted.
“We believe the current combination of high quality and high carry in such a portfolio offers a substantial buffer against the uncertain Treasury supply and portfolio correlation.”
