Now’s the time to lock in fixed income investments: Analyst

Fixed income investors are well placed to increase exposure and lock in longer-duration assets now, a leading analyst has advised, as the likelihood increases of a downward turn in global policy rates.

Current opportunities in fixed income and credit lean towards a longer-duration strategy, such as investing in long bonds, argues Richard Quin, principal and chief investment officer at Bentham Asset Management, a Sydney-based global fixed interest and credit investment specialist.

“These assets have the potential to yield higher returns as interest rates decline. With rates currently on hold, and the likelihood of a downward trend in the future, investors may benefit from locking in longer-duration assets,” he said.

“Some segments of the credit market are fully priced, and while optimism prevails, the delayed effects of monetary policy cuts have yet to fully permeate the system.”

Emerging from a prolonged period of low interest rates, fixed interest investments are once again fulfilling their intended functions for investors: that is as both an income generator and a means of reducing portfolio volatility, Quin said.

The likelihood of interest rates falling in coming months, in response to the sharp decline in inflation over the preceding 18 months, is expected to have some “dampening effects” on the economy.

For credit markets over the near term, investors can expect “strong demand, with substantial inflows into credit funds”.

“This demand has driven credit margins to their lowest levels since 2006, indicating very tight credit spreads. However, as monetary policy tightens, companies are facing rising interest costs, presenting challenges for the credit markets.”

Quin said Bentham, which is a credit market specialist, has increased its interest rate duration across its multi-sector portfolios in response to an increasing likelihood of multiple interest rate cuts globally, particularly in the US (however, a Trump victory in the upcoming US election may throw up some anomalies, including a rebound in inflation, for market analysts).

He added that Bentham has also raised the credit quality of its portfolios, “recognising that riskier credit instruments are either fully priced or lack sufficient risk premium given the potential challenges ahead”.

“To draw an analogy from motor racing ‘You never accelerate into a corner; you accelerate coming out of it’.

“We believe we haven’t fully entered the ‘corner’ with credit spreads still tight. We anticipate an eventual widening of these spreads, which will then present an opportune moment to increase exposure to the credit markets.”