Interest rates are up and bond prices have fallen. But next year, fixed income will be the place to be in the eyes of global allocations, according to a Natixis survey of institutional investors.
A large majority of respondents believe that the rise in interest rates, orchestrated by central banks, will make bonds attractive again.
“Given the outlook for central bankers to continue to fight inflation with rate hikes in the new year,” the study said, “seven in ten institutional investors (72%) believe rising rates will usher in a resurgence of traditional fixed income securities.”
Among other findings, the survey of 500 dispatchers in 30 countries concluded that next year’s volatility will make valuations material after the tech boom that ended in 2021. Alternative investments will also provide good returns, and private markets “will offer relief from the bear market.” ”
For the moment, bonds do not bring much to investors. The Bloomberg Agg, which tracks US Treasuries and investment-grade fixed income, is down 12.1% this year.
The consensus is that global rates will continue to rise next year: 54% of respondents expect further increases, compared to 20% who see none and 26% who expect declines. Of course, if rates continue to rise, bond buyers are at greater risk of price declines, as fixed income yields move in the opposite direction to prices, known as duration risk. Thus, nearly two-thirds say they will counter this risk by holding shorter-dated securities that are less vulnerable to duration issues.
Just over half want to reduce risk in their portfolios, which means switching from equities to bonds. And not just any bonds: the safer, the better. Nearly half intend to invest in high quality government or corporate bonds. There is much less enthusiasm for junk and emerging market bonds.
After a volatile year for bonds, institutional investors are split on the hyper-kinetics of bond markets in 2023: 36% expect volatility to decline, while 36% expect volatility to increase and 27% see no change.
Despite the renewed interest in fixed income securities, institutional investors see a potential downside: liquidity. stems from the Federal Reserve and other central banks ending their asset purchase programs. 36% of institutional investors say liquidity is a key portfolio risk in 2023.
There are two reasons for this, the survey says: “First, there is concern that should asset holders need to sell securities, there may not be a ready buyer’s market. Second, it could also make price discovery more difficult for those looking to buy.
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Tags: beneficiaries, Bonds, institutional investors, Rates, Liquidity, Natixis, Volatility