Abrdn’s global head of fixed income, Jonathan Mondillo, outlined a favorable environment ahead for bond investors, describing a “much more encouraging” backdrop today than recent history.
He cautions, however, that a more selective investment approach may be necessary to address ongoing risks in the market, particularly from the new Trump administration.
“Fixed income yields are relatively high compared to recent years, providing an attractive entry point into the asset class. We therefore expect positive total returns, driven by attractive carry and lower interest rates,” he said.
He expects strong corporate profitability to continue, which has been one of the factors compressing credit spreads between investment grade (IG) and high yield (HY) bonds, which have narrowed below their respective long-term averages.
“Corporate fundamentals remain resilient, with leverage and interest coverage ratios at comfortable levels, indicating that investors are being adequately compensated for taking credit risk. This view is also supported by credit agencies, which predict a relatively benign default environment,” he said.
“However, we are more cautious about lower-rated HY bonds and are very selective about exposure to these names.”
Mondillo highlighted that more than US$6 trillion currently remains on the fringes of the investment world, with fixed income becoming a “go-to destination” for much of this capital.
Interest rates are expected to fall, which will support bond yields, he noted. Additionally, global inflation appears largely under control and the abrdn does not forecast a “widespread recession” as economies cool.
Still, “while we do not expect large-scale defaults, careful screening to avoid underperforming stocks and sectors will remain crucial,” he said.
Expanding on this point, Mondillo highlighted that a combination of BBB (the lowest IG rating) and BB (the highest HY rating) bonds has proven to provide the best risk-adjusted results over the long term.
“This can be captured in a global income bond strategy. Investors who focus on managed strategies against traditional credit benchmarks often overlook and underestimate this part of the market,” he said.
“Structurally, a holistic approach can offer unique benefits, such as high returns, with investment-like risk.
“When combined with rigorous, bottom-up credit research, global income bonds can be an attractive option to deliver results for clients. »
