Fixed-income bonds making a strong comeback

The rise in inflation prompted central banks around the world to raise their interest rates significantly. This has left its mark on the fixed-income space. Over the past two years, yields in all fixed-income segments have increased many times over. Government bond yields have moved out of negative territory, while emerging market bonds have doubled and European high-yield indices have risen even more. As such, fixed-income markets have become much more attractive compared to other asset classes. The rise in bond yields means that current interest income is once again having an impact on the performance of fixed-income securities. This is a good sign for the market as the current yield is a key factor for the long-term performance of a bond portfolio.

When comparing the future return expectations for bonds and equities, a favourable picture emerges for bonds. The current higher initial yields on bonds – more than twice as high as three years ago – point to significantly better returns from fixed-income securities over the next ten years. In comparison, higher valuation multiples suggest a slightly less favourable environment for equities, as an economic downturn is expected in the near future and therefore no significant earnings growth can be expected.

A portfolio of fixed-income securities should be well diversified, for example with a mix of government, corporate and high-yield bonds. While investments in high-yield bonds benefit from better returns, some caution towards this segment is currently warranted, not least due to high inflation, increased interest costs, supply chain issues and macroeconomic uncertainties.

The money market – that is to say investments mainly with maturities of less than one year – is currently looking promising. This is especially true for those investing in Swiss francs. The Swiss franc money market is ideal for diversification and liquidity management; it is also advantageous for tactical reasons due to the current inverse interest rate structure. This results in the positive combination of excellent credit quality and high carry. Thanks to the significantly higher interest rates and consistently good liquidity, money market funds have become an attractive segment for a wide range of investors. Swiss Life Asset Managers has responded to this increased demand by expanding its range of money market funds.