Andrew Chorlton, M&G Investments' CIO for Fixed Income, argues that fixed income is once again an attractive asset class, marking a shift from its previous role primarily as a risk diversifier to a significant contributor to returns. He attributes this resurgence to the rise in real yields, initially driven by inflation fears and now by increased supply of government bonds globally, necessitating higher prices for investors. Chorlton emphasizes that "income is back in fixed income," a fundamental change rather than a short-term fluctuation.
Chorlton believes that demand for fixed income will continue to be fueled by the need for income in retirement, particularly given aging populations. He highlights that current market conditions offer a compelling entry point into government bond markets due to persistently positive real yields. He also notes that fixed income now has the potential to outperform equities, given that equities are not a particularly high hurdle to beat at present. For instance, a drop in 10-year gilt yields from 4.5% to 4% could yield close to a 9% return for investors.
In the current landscape of elevated geopolitical risks and economic volatility, Chorlton suggests that actively managed fixed income strategies are crucial. He advocates for diversification within fixed income portfolios, similar to equity portfolios, recommending a mix of domestic government bonds, corporate credit, and international or emerging market exposure. He also points to structured credit, such as asset-backed securities, as a valuable diversifier that can perform well in various market conditions, particularly amid uncertainties like potential tariffs.
While optimistic about government bonds, Chorlton expresses caution regarding corporate credit, believing that spreads in this sector currently price in an overly benign scenario with low default rates. In contrast, he views the rates market as having already incorporated many known risks, making sovereign bonds a more favorable risk-reward proposition. He joined M&G last year after over a decade at Schroders, taking over the fixed income division.
