Interest rates are on the rise, and bond prices have fallen. But come next year, fixed income will be the place to be in the eyes of global allocators, according to a Natixis survey of institutional investors.
A large majority of respondents believe the escalating interest rates, orchestrated by central banks, will make bonds attractive again.
“Given prospects for central bankers continuing to fight inflation with rate hikes in the new year,” the study said, “seven out of ten institutional investors (72%) believe rising rates will usher in a resurgence in traditional fixed income.”
Among other findings, the survey of 500 allocators in 30 nations concluded that next year volatility will make valuations matter again after the wild tech runup that ended in 2021. Alternative investments also will provide good yields, and private markets will “offer bear market relief.”
At the moment, bonds are not delivering much good to investors. The Bloomberg Agg, which tracks U.S. Treasuries and investment-grade fixed income, is down 12.1% this year.
The consensus is that rates worldwide will continue to rise next year: 54% of those surveyed expect more hikes, compared with 20% who see none and 26% who forecast cuts. Of course, if rates keep ascending, bond buyers risk more price decreases, as fixed-income yields move in the opposite direction from prices, known as duration risk. So almost two-thirds say they will counter that risk by staying with shorter term paper, which is less vulnerable to duration problems.
Slightly more than half want to de-risk their portfolios, meaning shift from stocks into bonds. And not just any bonds—the safer, the better. Almost half intend to go into government bonds or investment-grade corporate. There’s much less enthusiasm for junk and emerging market bonds.
Following a volatile year for bonds, institutional investors are divided on how hyper-kinetic fixed-income markets will be in 2023: 36% anticipate decreased volatility ahead, while 36% expect increased volatility and 27% see no change.
Despite the renewed interest in fixed income, institutional investors see one potential downside: liquidity. stems from the fact that the Federal Reserve and other central banks are ending their asset purchase programs. A full 36% of institutional investors say liquidity is a key portfolio risk in 2023.
Two reasons exist for this, the survey indicated: “First, there is concern that in the event asset owners need to sell off securities, there may not be a ready market of buyers. Second, it could also make price discovery harder for those looking to buy.”