One of the few rules that are always valid when it comes to investments is that markets move on expectations rather than news. Unless there are sudden shocks (as in the early days of the Covid-19 pandemic), financial assets are bought or sold by betting on what will happen in a few months.
Thus, even if the ECB has not yet provided any indications regarding the start of monetary easing, Bond issues in recent weeks have seen the yields offered reduced. A trend that is inevitably destined to accelerate as the first cut approaches. This is why it could be the right time to buy bonds, also considering that the securities in the portfolio tend to appreciate when the yields of new issues fall.
by Giovanni Pons
All this considering that the objective of the bond component of the portfolio is usually to protect the real value of the assetswhich is easier today than in the past given the slowdown in inflation.
Cuts partly already discounted, hunt for opportunities
“The market has already started to discount the rate cuts that will come later: there are still some opportunities, but we need to be selective”, is the analysis of Mauro Ratto, co-chief investment officer of Plenisfer Sgr. “We prefer corporate bonds with maturities between three and five years, and we look in particular at Europe and the USA, selecting companies capable of generating competitive cash flows, such as those in the energy or telecommunications sectors. Even the financial sector, which benefited from high interest rates in 2023 and has therefore already done a lot, still remains interesting,” he adds.
At the currency level, Plenisfer expects a weakening of the dollar which could benefit emerging market bonds issued in local currency. “In this area, however, during the year the electoral phases of countries such as Mexico or Indonesia will need to be monitored with particular attention”, underlines Ratto.
Competition from government bonds
Greater caution is expressed by the fixed income team AcomeA Sgr, according to which – unless there is a deep recession – the rate cut will be less marked than what the market has already expected. Hence the indication to wait for “more convenient levels to go back to buying bonds”.
Furthermore, with BTp yielding just over 3% in the five-year maturity and just under 4% in ten years, competition from government bonds is very strong. Also because earnings on government bonds are taxed at 12.5% compared to 26% on corporate bonds (and other financial assets). “We believe they could be an excellent parking spot while waiting to select corporate issues with premium coupons”.
Currency variable to consider
Furthermore, AcomeA reports the opportunity present on the bonds of emerging countries, also in local currency. Historically, a dovish Fed and a weak or neutral US dollar favor the trade balance of growing countries and their currencies.
So, how to structure a typical bond portfolio, it being understood that each investor is different from others in terms of characteristics, risk propensity and life goals. For AcomeA, in a five-year perspective it is possible to imagine a 30-40% exposure in BTp, a further 30% in one-year monetary instruments that yield more than 3% (such as, for example, the one-year BoT which yields 3.38%) and the remainder a combination of actively managed bond funds with a global emerging market government and global corporate focus.