Macroscope | Active bond investors stand to gain amid rising inflation and interest rates
- There are real opportunities for investors in bond markets provided they pay attention to geographical divergence and maturities that offer either an opportunity for capital gains or a place to hide from losses
At a time of rising inflation and interest rates, it is easy to dismiss fixed income as an asset class, particularly since bond valuations are relatively high by long-term historical standards. However, this view neglects the wider context.
Finally, higher inflation and expectations of rising interest rates have now been largely priced in by bond markets. Bond yields have risen in recent months, meaning new investors receive more interest income for each dollar they invest. Since yields move in the opposite direction to prices, that means prices are lower and bonds are now much better value.
There are real opportunities for investors in bond markets now. During the first couple of years of the Covid-19 pandemic, the big theme was how bond markets around the world converged. Governments and central banks everywhere provided huge, coordinated levels of support to their economies. Now, the theme is divergence.