Schroder’s Kellie Wood says it’s back to the good times for bonds but remains cautious on high yield, shorting the asset class.
After a miserable year for bonds, why are you excited about the asset class in 2023?
Schroder’s Kellie Wood can’t go past Italian, listing corporate hang-out Bambini Trust and Hemmes’ Bar Totti’s as her favourite restaurants in Sydney.Fixed income has transitioned from boring, to terrifying, to now exciting and offering great value for investors. Expected returns have risen to the highest levels in over a decade, and this asset class now stands out as offering good absolute and relative value versus other asset classes such as equities.
A pause in the rate hike cycle increases the likelihood that the RBA would need to potentially increase the cash rate by more in the future.Our US recessionary indicator is suggesting a 65 per cent chance of US recession in the next 12 months. This is not priced in markets with the risk for both a faster and more severe downturn. This makes defensive assets very appealing versus riskier credit-like high yield and equities.
Australian investment grade credit stands out as particularly appealing given its high risk-adjusted spread and outright yield around 5 per cent.We have a strong bias towards domestic bonds in our portfolios. From a valuation perspective Australian investment grade credit stands out as better value versus other global markets.
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