Generalising often leads to forgetting the troops. This is not the case. The debacle in fixed income – although less severe than the disaster of 2022, when rates shot up – is undeniable. So there is no asset manager, national or foreign, that does not have some fixed income fund in negative territory.
And in Spain, pure fixed income represents more than 40% of the assets of domestic investment funds – which number no more than 1,800 – and is present to a greater or lesser extent in more than two-thirds of the total. Because in Spain, risk aversion is such that, as José Mª Marcos Bermejo, general director of Entities at the CNMV, points out, the assets that Spanish IICs dedicate to pure equity do not exceed 16%, “a third of what is dedicated in countries around us.” In our country, more than 15% of households have investment funds, and over 20% have pension plans, with fixed income predominating in all of them. Preserving capital is, always, the initial premise. And that idea is associated – without much foundation – with fixed income, more than with equities.
In any case, how can one imagine that an “Absolute Return” fund will give you -3.37% in nine months when its objective is “to achieve capital appreciation through a flexible investment approach, focused on diversification and risk control,” for which it “will invest its assets directly or indirectly in a diversified portfolio of debt and equity securities and will seek exposure to absolute return strategies…” (BBVA Durbana International Fund Absolute Conviction B CHF CAP).
The "golden age of fixed income"
Churchill is attributed with the idea that “success is the ability to go from failure to failure without losing enthusiasm.” From that point of view, it is undeniable that the failures of 2022, like this one in 2026, will not be an obstacle to maintaining that Spanish obsession with fixed income. It is also fair to acknowledge that at the beginning of this year inflation seemed to be under control and that with the exception of a very small handful of managers -UBS, Pictet...- all analysis houses emphasized with great conviction the advantages of taking positions in high-quality (IG) and even high-yield (HY) debt, with longer maturities being better, to achieve maximum returns on investment.
Portfolios had to be positioned in fixed income in anticipation of interest rate cuts expected from central banks. Thus, in its strategic guidelines for the year (Investment Directions), BlackRock, the world's largest asset manager, highlighted the importance of securing stable income and recommended bonds with a focus on duration and maturity strategies to lock in high yields before rate cuts reduced them.
PIMCO, the fixed income specialist firm, called the start of the cycle the "golden age of fixed income" (prime time for bonds). Its main recommendation focused on high-quality government bonds with medium duration (5 to 7 years), arguing that they allowed capturing coupon returns and generating capital gains if economies slowed down.
In its annual market guides (Guide to the Markets), J.P. Morgan Asset Management positioned high-quality corporate debt (Investment Grade) as one of its favourite bets. It recommended overweighting bonds from solid companies - over equities - arguing that stock valuations were demanding, while debt offered historically attractive coupons with lower volatility.
28 February
Amundi, the largest European asset manager, estimated that interest rate cuts would accelerate the attractiveness of fixed income and advised focusing on high-quality corporate debt and sovereign issuances to secure coupons before official rates continued to decline... Today it has more than two hundred funds that offer negative returns so far this year. The most affected, of course, are long-term public debt funds. They are the most sensitive to rises in sovereign yields, and in portfolios with a duration of 7 to 10 years, the fund can lose between 7% and 10% of its value for every 1% that yields rise in the secondary market.
This is what happens with the Vanguard Euro Government Bond Index Fund, a very popular indexed fund in Spain that replicates sovereign debt from the Eurozone. With an average duration close to 7-8 years, any upward adjustment in government yield curves directly negatively impacts its net asset value in the short term. Traditional funds from Spanish banking networks that invest in corporate credit and/or European public debt, such as AXA World Funds - Euro Credit, Schroder ISF EURO Corporate Bond... are also suffering
And the problem can worsen with global fixed income funds without currency hedging, where Spanish investors suffer a double loss when the dollar depreciates against the euro and when US bonds rise in yield, as is the case with PIMCO GIS Total Return Bond - one of the most emblematic and largest global fixed income funds in the world - or Amundi Funds Global Bond.
In January of this year, the debacle of 2022 seemed almost forgotten, although it still weighed on the returns of thousands of funds. And no one could imagine that just a couple of months later, on 28 February, the US and Israel would attack Iran, the Strait of Hormuz would close, and oil would approach $100 per barrel. Much less could anyone imagine that the conflict would become entrenched with the consequent effect on inflation.
But after 28 February, the market consensus changed its stance and analysts began to quarantine the recommendations made at the beginning of the year. Waiting and seeing seemed the most prudent course. The cascading effect that a strong - and persistent - rise in oil prices could have on inflation could force central banks to act. And a rate hike could sink the prices of the bonds recommended just two months earlier.
Despite everything, there were recalcitrant managers: On 3 March, Karsten Junius, chief economist at J. Safra Sarasin Sustainable AM, pointed out 3 possible scenarios for the conflict, and in the worst of them - a prolonged conflict, which he only gave a 25% probability - he explained what could happen with different types of assets: “Fixed income: yields are likely to fall more significantly, as high oil prices and geopolitical uncertainty will lead markets to price in a higher probability of recession.” No comments.
The next day, 4 March, AllianceBernstein explained that “The reactions of the global bond market have been moderate so far. Yields on 10-year US Treasury bonds had been falling before the weekend, from around 4.3% at the beginning of February to 3.9% on Friday. The initial response to the outbreak of hostilities was a modest uptick in yields; however, if risk aversion conditions persist, the next move in yields could be downwards.” Downwards? Not exactly.
Recalcitrant
By the end of March, the conflict continued, which did not prevent Tiffany Wilding, economist, and Andrew Balls, CIO of global fixed income at PIMCO ($2.25 trillion in assets under management), from saying on the 27th that “Yields on the most liquid fixed income assets remain attractive, providing a solid foundation for income and market-driven returns. When combined with the opportunities arising from volatility and valuation errors, an exceptional environment is created for active management to seek alpha, or a return above the overall market. High-quality bonds can serve to generate returns, act as a cushion against equity volatility, offer valuable diversification if growth disappoints or risk sentiment deteriorates, and provide liquidity that can be reallocated when markets become unbalanced.”
And they concluded: “We prefer a slight overweight in duration. In the US, Treasury bonds remain a source of yield perceived as a “safe haven” and of portfolio diversification benefits. We prefer a more balanced exposure to the curve, as yields appear attractive across a wide range of maturities.”
Understandably, the CIO of Global Fixed Income at the world's largest asset manager insisted at the end of March on betting on fixed income. If you have lemons, you bet on lemonade. But US Treasury bonds? With debt already around $40 trillion, a 6% deficit, more than $800 billion in interest payments... Just five months later, the 10-year US bond has risen to over 5% (the 30-year bond exceeds it comfortably) while the German exceeds 3.5% and the French 4.7%, with the Spanish going beyond 4%... Levels not seen in 15 years. Or since 1996, in the case of the 10-year Japanese bond, which has also exceeded 3%.
At the beginning of September, Benoit Anne, senior managing director of MFS Investment Management, acknowledged that we are witnessing “The perfect storm of interest rates. Global bond yields are reaching new recent highs”... This led him to risk a new recommendation: “The rise in yields has improved the valuations of fixed income for investors with a longer-term horizon. This is especially evident in investment-grade (IG) credit, where fundamentals remain solid and initial yields are higher than in recent years. With US IG credit offering a yield around 5.50%, the entry point may present opportunities for long-term investors”... Is it true?