Asset Allocation

European investors this year found safety in short-term US debt and the dollar. This week’s Top 5 by Morningstar takes a look at the performance of US government bond funds in the year to date.

Central bank gold reserves have risen to their highest level in nearly half a century. Particularly emerging market central banks bought the precious metal big this year, influenced by a strong dollar and international sanctions against Russia.

High-yield bonds are not equal. In the US market this year, the difference in spreads between bonds with credit ratings of CCC and below versus BBs rose from 4.6 percent to 9 percent.

After two consecutive red quarters, global high-yield bond funds closed the third quarter with handsome gains. Yet it is premature to speak of a trend reversal.

Funds investing in emerging market bonds lost for the third quarter in a row when measured in dollars, but made a small gain in euros. 

For emerging markets, the third quarter of this year was almost the exact mirror image of the second quarter. The MSCI EM index recorded an underperformance compared to the MSCI World index, mainly due to a solid loss for Chinese equities. In Latin America, some markets actually made up for second-quarter losses in the past three months. Meanwhile, the war in Ukraine continues to weigh on Eastern European markets.

Many investors are on the fence about re-entering the badly battered bond market when the bottom may be near. The smart ones will want to enter the market well before interest rates hit their peak, says Michael Gitlin, partner and head of fixed income at Capital Group.

Infrastructure is not immune to the current economic malaise, but it is important to isolate macroeconomic variables for each investment. “Analysing sectors or asset classes is not enough: you have to analyse each asset to determine its macro impact.”

So says Heiko Schupp (photo), infrastructure fund manager at Columbia Threadneedle, in an interview with InvestmentOfficer.be.

Gold prices have been struggling since the beginning of the year, quoting below $1,700 per ounce, definitely indicating a downward trend. On Wednesday, the Federal Reserve raised rates by 75 basis points in another move to a range of 3 to 3.25 percent. 

This will probably be the worst but also the best year for bonds ever. Rising interest rates and credit spreads are causing hefty price losses. Inflation is a bond investor’s worst enemy and it is skyrocketing. The fact that interest rates and credit spreads are rising fast is good for bond investors in the long run. Panic and volatility always create opportunities.