(News Bulletin 247) – After years of scarcity, the time has come for revenge for bond managers who, with the rise in rates, are attracting new investors.
After a decade of low rates then a violent correction in 2022, bond managers are smiling again and attracting new investments into their funds. “At the moment, all the lights are green for cash and bond investors,” summarizes Vincent Juvyns, member of the JP Morgan strategy team.
For bond managers, lending for two years to the American state, a safe investment, brings in 5% each year, a performance similar to Wall Street’s Dow Jones index since January 1.
On the markets, investment in government or corporate debt or in company shares are two different strategies: the first provides more guarantees, but it is supposed to be less profitable in the long term.
The gap had even widened over the last ten years, where under the impetus of central bank policies, interest rates had approached zero, or even become negative for certain States in Europe.
Ultra-low rates also penalized bond managers’ other way of making money: on the secondary market for debt securities, the price of the bond moves in the opposite direction to its interest rate. With very low rates, the price of a bond was therefore very high and the possibility of capital gains low.
Bonds regain pride of place
In 2022, the sudden rise in rates resulted in historic losses in the value of bonds. But since this purge was made, bond funds have regained pride of place: in September in Europe, investments in these investments exceeded withdrawals for the eleventh month in a row, reported the financial data provider Morningstar.
“We feel a real appetite, from companies to individuals, even if the market is more difficult for them to access,” notes Aurélien Buffault, director of bond management at Delubac AM.
He mentions new products and funds that are being developed, for example maturity funds which allow money to be blocked on a loan until its repayment, which offers visibility, or baskets of bonds (ETFs), which require less investment. But clients are also already on alert about the possibility that central banks will relax their policy in the first months of 2024, he observes.
The dynamic is the opposite in equities with withdrawals from multi-asset funds and equity funds, illustrating for several quarters the return to favor of these bond products, reported European asset manager Amundi during its third quarter results. .
And the climate of “risk aversion” on the markets, favorable to safer investments, “should continue until the end of the year”, estimated the general director of Amundi Valérie Baudson.
“Default rates will rise in early 2024”
On companies, managers can choose to lend to healthy groups with lower interest rates or look towards the high yield market.
The interest rate on all of these more risky companies “is around 8%. Two years ago it was 2.5%. This is becoming interesting”, illustrates Alexis Renault, director of High Yield strategy within the investment bank Oddo BHF. For healthier companies, the rate went from “0 to 4%”, he observes.
But faced with economic deterioration, “default rates will rise at the start of 2024” both in the United States and in Europe, warns Alain Krief, head of bond management at Edmond de Rothschild.
Combined with the slowdown in activity, the rise in interest rates risks suffocating certain companies, particularly in sectors such as “real estate, retail (distribution Editor’s note), construction”, describes Alain Krief. He put together “a list” of these risky companies. These situations could lead to painful debt restructuring for creditors.
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