Bonds are providing investors with fair value for the first time since the global financial crisis (GFC) as interest rates emerge from a central bank-induced coma, according to Western Asset Management’s Anthony Kirkham.
Kirkham, head of Asia Pacific investment management for the US-based fixed income specialist, told a Russell Investments NZ webinar audience last week that the “ability of bonds to provide yield has come back quite quickly” following the recent sharp rise in global interest rates].
“And bonds look fair value in relation to risk assets for time since before the GFC,” he said.
Despite taking a huge reputational dent in 2022 when the global bond indices took a record-breaking double-digit dive just as equities crashed to similar lows, Kirkham said the asset class was also showing signs of regaining its powers of diversification.
Shares and bonds have been positively aligned from early in 2020 with the respective global indices recently hitting a three-year rolling correlation high of about 0.6 (or 0.74 for a NZ dollar-hedged benchmark): the three-year rolling bond-equities correlation has averaged 0.04 for the 20 years from February 2004.
While the positive correlation between the two marquee asset classes has eased a little, he said the post-2022 bond market turnaround is likely to follow a different path from the previous big fixed income pile-up in 1994.
“I remember 1994 well,” Kirkham said but 2022 will likely burn a deeper memory given the larger scale of the disaster.
Global bond markets recovered some lost ground last year “but not like 1995”, he said, when the asset class posted one of its best-ever years.
“There’s different circumstances this time,” Kirkham said, citing the post GFC period where central banks forced yields down close to zero or even below until inflation forced a monetary policy rethink starting late in 2021.
But with the “global inflation moderation” now playing out – in spite of some last-mile concerns – and expected policy rate easing later this year, he said bonds will continue to provide traditional portfolio duties including income-generation, diversification and capital protection within a highly liquid market.
Kirkham also emphasised the long-term outperformance record of active management in fixed income, which hinged on important structural differences compared to equity markets.
Bond index-followers, he said, must invest in the most-indebted borrowers, are forced buyers and sellers while accruing high turnover costs to keep up with rapidly changing benchmarks.
“You need the skills to do it but active management can add real value in fixed income,” Kirkham said.
Founded in 1971, the Pasadena-headquartered Western, an underlying manager in Russell bond funds, has more than NZ$614 billion under management. Now part of the US-listed multi-affiliate investment firm, Franklin Templeton, Western only offers cash and fixed income strategies.