‘Peak rates’ and opportunities for credit selection in 2024

After two years of declines, 2023 proved to be another tough year for bond investors. However, a powerful rebound towards year end helped the global bond index end the year in positive territory for the first time in three years. Below, Jim Leaviss, CIO Fixed Income at M&G Investments, shares his views on the prospects for bond markets in today’s ‘peak rates’ environment, while senior credit portfolio manager Richard Ryan looks at the opportunities presented by fundamental credit selection.

Peak rates?

The backdrop to the turbulent performance of the last few years has been ongoing monetary policy tightening by major central banks in an attempt to bring persistent inflation under control. Interest rates have subsequently reached levels last seen before the Global Financial Crisis of 2008/2009.

The rate hikes have brought the era of ‘cheap money’ to an abrupt end – except in Japan which has persisted with its negative rate policy. In response, sovereign bond yields have continued to climb: at one point the US 10-year Treasury yield reached a 16-year high of 5% before retreating to a level broadly in line with its long-term average.

While there is indeed a plethora of worries that has fuelled the negative sentiment towards bond markets, we believe that the major change in valuations that has taken place has created an opportunity for investors in government bonds. In particular, we think that, for the first time in many years, duration is now attractive, and we started to increase duration in a number of our portfolios in 2023.

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