Bonds are now recognised as a legitimate investment alternative, long overdue for acknowledgment. Peter De Coensel, CEO of Degroof Petercam Asset Management (DPAM) since 2021 and a seasoned bond market specialist, discusses this resurgence in value.
De Coensel highlights a dramatic shift in bond markets, noting a return to valuations not seen in nearly two decades, occurring in three distinct phases.
“First, inflation expectations began to climb in late 2020,” he said. “Then, from March 2022, the Fed initiated a significant rate hike cycle, leading to an aggressive bear-flattening of the yield curve. Recently, we’ve entered a stabilisation phase, with long rates impacted by concerns over persistent high budget deficits.”
Return of the vigilantes
As someone who cut his teeth in the industry as a market maker in government bonds, De Coensel sees the re-emergence of ‘bond vigilantes’, keeping governments in check on fiscal discipline.
“One poor report can already prompt a rise in long-term interest rates,” he observed, though he believes the short end of the yield curve remains firmly in place.
De Coensel heralds the start of a robust bond market, emphasizing the fixed returns that bonds provide, unlike equities. “If you’re looking to lock in value contractually, now is the time,” he advises. He outlines the current attractive rates in investment-grade (IG) bonds in Europe and the U.S., as well as the potential yields in the high yield sector, even accounting for potential defaults.
Embracing diversification
For De Coensel, bonds remain an essential diversification tool, particularly as investors re-evaluate after a challenging decade for bond markets. He advocates for geographic diversification within fixed income, praising the historically lower debt ratios in emerging markets and suggesting that the financial stability of OECD countries may be more precarious than that of robust emerging markets under extended restrictive monetary policies.
Addressing geopolitical tensions, De Coensel observes the shifting global centre of gravity towards the East and South, necessitating greater global diversification in fixed income. He underscores the need for thorough analysis of regional interest rates and potential value in different sectors and regions due to these geopolitical shifts.