Fixed Income Assets Remain Attractive to Long-Term Investors

Today, the global landscape is becoming increasingly complex, characterized by slowing economic growth and rising risks. Unpredictable trade policies make almost all macroeconomic assumptions vulnerable to questioning, including inflation and employment trends.

Facing market uncertainty, investors have even more reason to rely on fixed income assets' dual characteristics - stability and yield. In fact, this dual characteristic becomes easier to predict over time.

Fed may cut rates by year-end

Or potentially twice

On the global economy, so far, the global economy remains resilient, but potential risks are forming. Our basic assumptions about the US economy remain modest growth, with US GDP growth expected to be below trend levels. However, continued uncertainty increases the possibility of economic recession or stagflation. In contrast, we expect European and Asian economies to become more stable.

On interest rates, although currently still cautious, the Fed may need to restore easy monetary policy if tariffs impact US economic growth, potentially cutting rates twice by year-end. We expect long-term interest rates to remain within a relatively wide range of historical fluctuations. The US 10-year Treasury yield is expected to be between 3.75% and 4.75%.

On the dollar, due to persistent deficits, debt costs, and tariff uncertainty, the dollar's weakening makes non-hedged local currency bonds more attractive.

Credit fundamentals remain stable

Yield rise enhances bond attractiveness

Although the market is volatile, credit spreads may maintain their range-bound fluctuations. Economic growth slowdown and market anxiety rising may create an "adequate" environment for credit markets to achieve above-average returns in the future. We remain positive on fixed income assets, whether viewed from absolute return or relative return compared to cash and stocks.

In a period of stock market turmoil, bonds demonstrate stability, providing investors with a safe haven and stable returns. During the 2022-2023 Fed tightening cycle, there was an abnormal strong correlation between stocks and bonds, but this correlation has returned to typical low levels. In recent market volatility, bonds have performed better than stocks, reflecting a more normal dynamic.

Historically, when bond yields are between 4% and 6%, and stock valuations are high (P/E ratio exceeds 23 times), bonds tend to outperform stocks over the next decade.

Long-term perspective

Fixed income assets remain attractive

Dumbbell strategy: In a background of increasing interest rate uncertainty, investors can achieve more stable returns by balancing short-term positions and long-term allocations to create a neutral duration exposure.

Focus on high-quality assets: High-quality bonds, such as priority-secured loans (CLOs) and investment-grade credits, are particularly attractive. These assets can provide stable returns while diversifying stock risks. Compared to many fixed income asset classes, CLOs currently have more value. Given investors' preference for low-risk exposure is shifting, investment-grade corporate bonds also become more attractive.

Global allocation strategy: Considering the significant uncertainty of US policies and the dollar's weakening, investors can benefit from more stable and attractively valued international bond yields.

In a backdrop of slowing economic growth and rising downside risks, fixed income assets remain attractive to investors seeking long-term returns. Bond investments not only provide steady returns but also enhance the stability of investment portfolios. Market intermittent fluctuations can create opportunities for active management.

(The author is a co-chief investment officer at BDA Partners. The guest's views represent personal opinions and do not represent the position of this publication.)