Central banks drive the most conservative investors crazy: how to take advantage of fixed income

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Experts have been saying for 15 months that we are living in a historic moment to invest in fixed income (promissory notes, bills, bonds, debentures) but they have been half wrong. They are right when, after a decade of zero or negative profitability, interest rates have risen and, for example, now in Spain it is possible to buy a one-year Treasury bill at 3.5% and a 10-year bond at 3.32%. But they have been wrong about the gain in the price of the bond that will occur when the central banks lower the price of money again and the bonds become more expensive as they adjust to the new yields. A gain was already expected as a result of the rate cut in long-term fixed income in 2023 and it did not arrive. And things have not improved in 2024, since in the first quarter of the year bond investors accumulate a loss of 3.1%. Thus, the profitability of Spanish 10-year bonds was 3.13% at the end of 2023 and is now at 3.32%, causing a decrease in value. In the case of the United States, the situation is more forceful: they closed last year at 3.88% and are now trading at 4.63%. That is why the insistence on knowing when the ECB will lower the price of money (now at 4.5%) and the US Federal Reserve (with 5.5% in its intervention rate). Alhamar Fernández, head of fixed income at BBVA AM considers that rates in Europe are unjustifiably high, infected by the rise in the United States. “Europe has controlled inflation and low growth and, yet, rates are at the same levels as when inflation was 5%-7%.” And he adds: “We are facing a historic opportunity for fixed income, since the ECB has to lower rates so as not to derail growth in Europe with inflation of 2.4%, which will surely end at 2% in June.” However, this expert maintains his doubts about the autonomy of the ECB in the face of what the US central bank does (with a thriving economy and inflation of 3.5%), due to the effect it may have on the exchange rate of the currencies: the euro can depreciate if it lowers rates, since money would flow towards the dollar. For her part, Ana Gil, director of fixed income investments at M&G, also emphasizes the different economic moment of Europe and the United States with the same 2% inflation target to start lowering the price of money. He hopes, therefore, that the Federal Reserve will cut rates later than Europe and considers it advisable to take advantage of the current profitability levels of 4% on the debt, «since they are very attractive both to invest and collect that interest at maturity, as well as by increase.» price in the face of a scenario of lower rates,» he indicates. Unlike the stock market, which has been on an uninterrupted path of increases since October of last year, in the fixed income markets there is much more volatility waiting to see what they do. macroeconomic data and the responses of central bankers who seek the difficult balance between controlling prices and not being a drag on economies' growth. The latest inflation data in the US has put a damper on expectations of a rate cut in June. Mario Aguilar of Janus Henderson summarizes this change in sentiment: “Expectations of rate cuts by the Federal Reserve went from six, the first of them in March, to the current three cuts, the first of them in June. Rates are likely to fall this year, although not as fast as expected,” he explains.


Short term long term; public debt, fixed income of companies… are the main lines to decide an investment. Debt and short term mean less risk, and companies and long term more possibility of winning and also losing. Rafael Valera, CEO of Buy & Hold, explains that at the moment they prefer business credit, since it provides a higher initial coupon yield than the sovereign bond. “The majority of our current high-yield bond positions correspond to subordinated debt securities of banks with high corporate ratings due to their proven solvency and resilience in the face of possible increases in default rates. Furthermore, the fact that in many cases they are issues of unlisted entities – such as Cajamar and Ibercaja in subordinated debt or Abanca and Kutxabank in senior debt – leaves them protected from possible bearish attacks such as the one that the sector suffered after the bankruptcy of Credit Suisse a year ago,» he explains. Alhamar Fernández is in favor of investing in short-term assets and «when rates start to fall, move to longer terms.» For her part, Ana Gil recommends being in the short term at most one year, given the inverted rate curve, and considers that it is worth taking positions in 10 years while waiting for the rate drops to arrive and the market to change. market sentiment. She also sees bank issues as cheaper compared to non-financial issuers and points out a curious fact: “We are not buying when the issues are launched (primary market) because the premium has been greatly reduced compared to the bonds that are already listed. . “Before there was a differential of 25 basis points (0.25 points), but it has been reduced to 7 basis points (0.07 points),” he concludes. Pedro del Pozo, investment director of Mutualidad, offers a prudent vision to the when investing in fixed income: “We lean towards less risky options such as public debt and potentially more profitable without exposure to currency risk.” And he adds: “In the area of ​​corporate debt, the financial sector is emerging as a particularly promising area. Its volume of issues, larger compared to other sectors, presents a diversity of bonds with highly attractive characteristics for investors,” he explains. Finally, Guillaume Rigeade, from Carmignac, indicates that in his funds they favor the short part of the curves rates from the main developed countries (United States and Germany), which present a particularly attractive risk/return profile and should benefit from monetary easing by central banks in the second half of 2024.

Better through funds

With the exception of the direct purchase of public debt through an account at the Bank of Spain, investing in fixed income by an individual is not easy and it is more interesting to do it through investment funds, according to experts. Ana Gil, from M&G, highlights the diversification, the ability to analyze credit and, therefore, the risk that fund managers have and, finally, highlights the greater tax advantages over direct purchases. For his part, Rafael Valera, from Buy & Hold, emphasizes that the best investment option for an individual is in truly actively managed funds. “With them you can really capture revaluation potential and, in addition, access a well-weighted and diversified portfolio that, otherwise, is very difficult to obtain because the minimum entry for investment in a bond is usually about 100,000 euros. In this way, through direct investment there is a risk of incurring high concentration,” he explains. Finally, Alhamar Fernández, from BBVA AM, points out as clear advantages the diversification and active management that the funds offer to move within the yield curve. «For example, if you buy one-year Treasury bills, you have the money committed to that term and you could miss out on the gains on the bonds if rates fall.» Follow all the information about Economy and Business on Facebook and xor in our weekly newsletter