Waverton’s Carter: Safe haven credentials will return to fixed income in 2023

Investors had been questioning the place of fixed income in multi-asset portfolios in recent years, particularly after an incredibly poor 2022 when bond prices fell, yield was scarce and the inverse correlation between bonds and equities broke down.

Carter, who manages fixed income portfolios totalling over £1.3bn, had been underweight bonds after years of a painful grind upwards in yield terms, but is now seeing several factors leading to a very bullish backdrop for the asset class.

“Having gone through the immense difficulty of fixed income over the last year, the silver lining of that is now the yield on offer, especially on long-dated bonds, is now becoming particularly attractive,” he said. “We are back to a point where we are generating a real yield.”

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On 5 January, the market value of negative-yielding bonds fell to zero for the first time since 2010, following an unexpected policy shift by the Bank of Japan. In comparison, the market value of debt trading at a yield below zero rose above $18trn in late 2020.

Fixed income fell alongside equities in 2022, but Carter argued the defensive characteristics of government bonds are back, particularly for long-dated gilts and US Treasuries.

“I am a firm believer that in a recessionary scenario, one that seems inevitable for 2023, we are going to see that negative correlations are to return to government bonds,” he said. 

With the consequent weaker inflation outlook and several interest rate hikes priced into markets, the real yields available at the long end of the Treasury curve will start to look more appealing to investors taking some risk off the table, he added.

Not the bottom for credit

Credit markets went through a brutal correction in 2022, as did government bonds.

Rising yields and credit spreads mean opportunities are starting to open up in the market, but investors should beware of a rocky road ahead as a recession looms, Carter noted.

“I actually think government bonds are looking more attractive for the next three to six months over credit because conditions for corporations are not looking great,” he said. 

According to Carter, the earnings picture for balance sheets will be challenging, fundamentals are going to deteriorate and spreads are likely to remain elevated in the short term.

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“It is not until you are in the eye of the storm of a recession that you see the opportunity. I think that is probably three to six months away from here. I do not feel like that is today, sadly, as much as I would like to say we are buying credit wholesale,” he said. 

In light of this, Waverton’s fixed income portfolios have reduced their relative exposure to credit and have only kept names in the short-dated, high quality parts of the markets. 

“We are looking at companies that are probably going to perform well in a recession, and avoiding the more cyclical and long-dated names, I think they will continue to be pressured,” he added.