Higher rates should mean higher long-term returns
Bonds offer an asymmetric return profile
High yield credit is now a real alternative to equities
Broadening your investment universe has benefits beyond diversification
In our view, the neutral rate, or level of real interest rates at which central bank policy is neither stimulating nor restricting economic growth, has shifted upwards.
This raises the range in which central banks will be conducting monetary policy in the years ahead and allows investors to generate meaningful income-based returns.
Higher levels of income now act as a buffer against further losses should yields rise, but
if yields decline there
is the potential for meaningful gains.
In our view, the higher yields available in credit markets make this positive asymmetric return profile even
more compelling.
In our view high yield credit is a key alternative growth asset in 2024 – offering potentially equity type returns but with lower historical drawdown risk.
Higher yields are likely to prove challenging for equity valuations, and credit markets now potentially offer a better alternative to equities.
There are under-owned investment opportunities
in credit markets that need
to be investigated.
US municipal bonds are an asset class that naturally complements an allocation
to US credit, offering comparable yields but with lower historical default rates.
Secured finance offers a
way to generate attractive income, but powerful waterfall structures make the asset class fundamentally defensive.
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