Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 462

Income opportunities in global bonds

The first half of 2022 has been a volatile period for most asset classes. Equities are well off their highs, and for the traditional fixed income investor, the spectre of rising interest rates – which correlate negatively with bond prices – is an unwelcome sign.

But things aren’t all terrible, and we would argue that there is a possibility the world an avoid recession. Within this outlook, there are still opportunities for the fixed income investor.

Global macroeconomic outlook

Around the developed world, central banks have been adjusting their monetary policy settings in response to increasing inflation.

The combination of COVID-19 stimulus, supply constraints and the invasion of Ukraine by Russia, has led to meaningful increases in inflation. The labour market, particularly in the US, is also very tight, with around two job openings for every person looking for a job.

This has caught the US Federal Reserve (the Fed), and many other central banks including Australia’s Reserve Bank, off guard. The resulting central bank policy actions with regard to interest rates are clearly behind the curve. The Fed itself has already acknowledged this:

“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.” 

Markets are now forecasting a number of rate hikes before the end of the year in most developed markets.

However, we believe that inflation may be near its peak, and while it may be a little bit sticky, we are optimistic that central banks acting ‘expeditiously’ now, will result in inflation moving lower over the next quarter to 12 months.

Growth will slow as interest rates rise but a strong employment backdrop provides good fundamental support and some degree of stickiness for the broad economic outlook.

These are strange times indeed, but COVID-19 was a once in a lifetime experience and its policy ramifications – both good and bad – will take some time for markets to work out. As such, a Wall Street slowdown may not impact Main Street to the degree it might have in prior recessions.

Fixed income opportunities

Given those conditions, let’s examine some opportunities for fixed income investors looking for yield in the next 12-18 months.

Government and sovereign bonds will be impacted in the short term by rising interest rates. But that does not rule out all fixed income opportunities, especially those in corporate bonds or credit. As outlined above, the labour market is currently very durable and companies are generally in a good position with regards to profitability and the ability to service debt. The combination of these factors mean the likelihood of broad defaults is quite low.

In this environment you can buy BBB-rated investment grade credit in very solid businesses with yields of around 5%. That is a higher yield than currently available in most equity markets. This has not been the case in the low yield environment for the past two to three years.

There is an opportunity to own solid investment grade corporate debt in companies with sound fundamentals and at yields that are attractive in both an absolute sense and relative to alternative yield options like shares. The price decline in recent months provides an element of price appreciation in-tandem with the aforementioned yield. Investing in short duration fixed income of three- to four-year maturities means less price risk than longer-term bonds. 

Looking beyond residential property

Another area we like is commercial property and commercial mortgage-backed securities (CMBS) as they offer a way of incorporating stable income across a targeted set of property types and assets. Commercial mortgage-backed securities can also offer resistance to the inflation backdrop as real property prices will often go up during inflationary periods.

Our investment strategy maintains a favourable view on multi-family, industrial and select office property where fundamentals remain strong despite COVID-19. Commercial real estate debt continues to provide a higher return to that of similarly, or sometimes lower, rated corporates.

Emerging market sovereign debt

There are some markets where sovereign debt is attractive and emerging markets have been particularly interesting over the past 12 months. The past year has been one of the rare times when central banks in emerging markets have raised rates ahead of the developed world. Typically, you see the reverse, with developed markets like the US, Australia or Europe raising rates first.

However, emerging markets have experienced much more elevated inflation levels in the past year or two, coming out of COVID-19, relative to the developed world and their central banks have been raising rates much faster than the developed world. That now puts them in a position to be able to actually cut rates. And if there is a global slowdown from an economic standpoint, the emerging market world will be able to ease relative to the developed market.

In this kind of environment, emerging market investment grade debt provides relative value and long-term additional spread compensation. As the below charts show, spreads in emerging market high yield debt also show value compared to US alternatives.

Relative value in emerging market sovereign debt

Bottom line

The economic outlook might look volatile and uncertain but there is still good news for investors with the right attitude.

We believe there are good opportunities in investment grade corporate debt where yields of 5% can be found. We like commercial real estate and are maintaining a preference for securitised debt with an emphasis on collateralised loan obligations and commercial banked mortgage securities given stable fundamentals, relative value, and broad demand for the asset classes.


Eric Souders is portfolio manager of the GFSM Payden Global Income Opportunities Fund. Payden & Rygel is a specialist investment manager partner of GSFM Funds Management, a sponsor of Firstlinks. The information in this article is provided for informational purposes only. Any opinions expressed in this material reflect, as at the date of publication, the views of Payden & Rygel and should not be relied upon as the basis of your investment decisions.

For more articles and papers from GSFM and partners, click here.



Leave a Comment:



Fixed income solutions in a rising rate environment

Inflation? Nothing (much) to see here

How bonds may temper equity market disappointment


Most viewed in recent weeks

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Latest Updates

SMSF strategies

30 years on, five charts show SMSF progress

On 1 July 1992, the Superannuation Guarantee created mandatory 3% contributions into super for employees. SMSFs were an after-thought but they are now the second-largest segment. How have they changed?

Investment strategies

Anton in 2006 v 2022, it's deja vu (all over again)

What was bothering markets in 2006? Try the end of cheap money, bond yields rising, high energy prices and record high commodity prices feeding inflation. Who says these are 'unprecedented' times? It's 2006 v 2022.


Tips and traps: a final check for your tax return this year

The end of the 2022 financial year is fast approaching and there are choices available to ensure you pay the right amount of tax. Watch for some pandemic-related changes worth understanding.

Financial planning

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.


Listed infrastructure: finding a port in a storm of rising prices

Given the current environment it’s easy to wonder if there are any safe ports in the investment storm. Investments in infrastructure assets show their worth in such times.

Financial planning

Power of attorney: six things you need to know

Whether you are appointing an attorney or have been appointed as an attorney, the full extent of this legal framework should be understood as more people will need to act in this capacity in future.

Interest rates

Rising interest rates and the impact on banks

One of the major questions confronting investors is the portfolio weighting towards Australian banks in an environment of rising rates. Do the recent price falls represent value or are too many bad debts coming?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.