The Global Aggregate Index published by Bloomberg closed out the month of November 2022 on a positive note of 4.7%. The index is a broad measurement of the worldwide performance by investment grade bonds, whether sovereign, corporate or even securitised. This net positive monthly performance is just a few basis points shy of the numbers for December 1991, September 1998 and September 2003, and second only to December 2008 among the top 32 years recorded.
On the surface, this is a fine monthly performance, but it conceals a horrific 2022. Despite the abrupt rebound, the Global Aggregate is, in fact, headed for its worst year, with a negative performance of more than 15%, relegating the 5% loss in 2000 or 2005 to a “friendly” correction. And 1994, known as the year of the “bond crash”, had itself ended on a smooth note.
We know why the bond markets are in a panic: runaway inflation in most economic regions, bottlenecks to produce more and faster, public deficits exploding in the developed economies, aggressive central banks that have all been “Volckerised”… It’s an explosive cocktail.
Still, the horizon seems to be starting to clear. After years of zero or even negative yields, the fixed-income compartment today is actually harbouring a string of issuers offering attractive returns. A five-year LVMH bond, for instance, is earning 2.5% after generating a negative return scarcely more than a year ago, while Iliad is offering more than 5.5% for the same type of maturity. Yields are topping 7% on the best High Yield borrowers.
Now if the bond markets could just shake off this volatility… Proportionally, volatility on the fixed-income markets has been quite a bit higher than on the equity markets, ever since the central banks began their serial rate hikes. They have yet to set their intended terminal level for rates. As in every economic or financial crisis, stabilising the bond markets is a prerequisite if the equity markets are to achieve calm for a longer period.
In the meantime, the credit markets—especially private corporate debt, whether senior or subordinate, convertible or more traditional—have an attractive risk/return trade-off, in our view. With fixed income risk being properly rewarded at last, any investor, regardless of their preferred asset class, should feel reassured.
Disclaimer: The opinions expressed in this document are the author’s own. LFDE shall not be held liable for these opinions in any way.
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