1. Newsroom
  2. What lies ahead for bonds after this volatile start to the year?
UBP in the press 19.05.2021

What lies ahead for bonds after this volatile start to the year?

What lies ahead for bonds after this volatile start to the year?

Asset TV Masterclass (12.05.2021) - Mohammed Kazmi, Portfolio Manager & Macro-Strategist Global and Absolute Return Fixed Income at UBP, recently took part in an Asset TV broadcast, explaining why he maintains a constructive view on the fixed-income segment and outlining where he sees opportunities in the asset class.

The rise in US yields and the fear of inflation unsettled fixed-income markets in the first quarter of this year. However, yields have been rising on the back of stronger growth as economies are set to reopen, and the sharpest correction in yields that we saw in Q1 is probably behind us. That said, there is still room for yields to move higher from current levels said Mohammed Kazmi, along with other industry experts, during a recent Asset TV broadcast on fixed-income fund selection.

Indeed, contrary to what happened during the infamous “taper tantrum” in 2013, when the Federal Reserve’s then-governor Ben Bernanke unsettled financial markets by talking up the prospect of tapering asset purchases which caught investors off guard, this time around it is the financial markets that are pricing in a less accommodative approach from the Fed.

The good news here is that, by now, investors appear to have priced in much of the negative effects of higher inflation and a less supportive Fed. Additionally, while it makes sense to hedge against short-term upside inflation risks, it is worth pointing out that it is still not clear if any of the longer-term trends that have kept inflation in check over the past few years, such as globalisation and demographics, have changed. Volatility should also remain under control, given that central banks are more than willing to intervene in financial markets at the first sign of trouble, as we have previously seen on several occasions.

The main challenge for investors is that government bonds no longer provide an adequate risk buffer against equity market drawdowns in a multi-asset portfolio.

On the upside, Kazmi argues, credit spreads are exhibiting lower beta to these equity moves given the central bank backstop. In order to benefit from the expected economic rebound, higher beta segments of credit, such as high yield and AT1s are favoured, where a steeper yield curve should support financials and these parts of the market still offer adequate yield premiums over government bonds. Since the impressive vaccine efficacy results in November, he has also been increasing his exposure to corporate bonds in cyclical sectors such as autos, although he thinks one should stay cautious on areas associated with airlines and downstream refiners that may take longer to recover.

In conclusion, a further uptick in both yields and inflation is to be expected given the strong growth outlook, which has prompted Kazmi to continue to hold a short-duration bias. However, another sharp spike to the same extent that we saw in Q1 now seems less likely, which should generate an environment in which credit spreads can perform well.

Global & absolute return fixed income

Mohammed Kazmi

Portfolio Manager & Macro-Strategist
View his Linkedin profile


Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

Most read

UBP in the press 29.01.2021

Fixed income outlook: Positive environment for credit

Institutional Money (27.01.2021) - Despite an accelerating Covid-19 spread into year-end, risk markets concluded 2020 on a strong note as investors took confidence from the commencement of the vaccine rollout in the US and UK. 

UBP in the press 03.02.2021

Compelling opportunities in Japanese small-cap techs

Funds Society (28.01.2021) - An improvement in corporate governance, a stable government and a leading edge in digitalisation and robotics are making the Japanese small-cap segment a rich source of attractive opportunities for selective investors, says UBP Senior Analyst Cédric Le Berre.

UBP in the press 01.03.2021

Compliance in the RegTech era

Le Temps (01.03.2021) - For two decades, Swiss private banks have been engaged in a new test of endurance as they have had to adapt to a raft of new regulations, tougher tax compliance requirements and the globalisation of their client bases.

Further reading

UBP in the press 28.07.2021

Investing for profitable positive impact

Money Week (31.05.2021) - How we live our lives and how we choose to invest our savings have typically been worlds apart. Happily, it has recently become possible to bring these two elements much closer together. There’s a growing number of listed companies that are working hard to understand their place in the world beyond simple profit.

UBP in the press 26.07.2021

Libor is dead, long live Saron!

Le Temps (26.07.2021) - The final countdown is underway. In less than six months, on 1 January 2022, the world of finance will enter the post-Libor era.

UBP in the press 21.07.2021

Japan’s corporate landscape enhanced by governance reform

Agefi Actifs (23.07.2021) - Significant improvements in corporate governance in Japan – as shown in particular by increasing female representation in companies' governing bodies – could drive stronger momentum in the Japanese market over the long term.