Two-tier bond strategy

The US central bank, the Fed, had announced an interest rate pause, but expressly reserves the right to make further interest rate steps. The ECB, on the other hand, raised key interest rates once again and intends to continue doing so. “Experience shows that the overall effect of the monetary tightening so far can only be assessed 12 to 18 months later”, says Gerlinger. “So central banks will now take a less active, more observing position and see how their rapid interest rate steps take effect.” In any case, the interest rate turnaround is not yet certain, even if the markets are already pricing that in to some extent. “The Fed, for example, has never initiated an interest rate cut when inflation is so high and unemployment so low”, says Gerlinger.

In the case of US government bonds, the expectation of possible interest rate steps still to come at the long end has again led to a temporary rise in yields. “Due to the very inverse yield curve, we consider the short maturity end with a yield of 4.7 per cent to be interesting”, says Gerlinger. “The long end is promising due to an expected recession and declining inflation rates, which is why we tend to increase duration somewhat in the portfolios”, Gerlinger says. Caution is called for in US Corporates and High-Yield bonds. Spreads have temporarily widened in the wake of the banking crisis and still the priced-in default rates are still higher than the actual default rates. “The current High-Yield yield level is interesting, but in our opinion the spread still does not reflect the risk of recession”, says Gerlinger.

In the euro area, yields are falling in the wake of weaker purchasing managers’ indices and declining headline inflation data. The ECB is expected to raise interest rates one more time. “As the economy weakens, interest rates are expected to fall in the near future, but stubborn core inflation continues to weigh”, says Gerlinger.

When it comes to implementation in the portfolios, floaters are a good choice. “We are holding on to our floater exposure and reducing it only slightly for the time being”, says Gerlinger. “In addition, we are further reducing High Yield, as in the event of a recession the segment will come under particularly strong pressure. The long end offers attractive returns in investment grade, and we are also expanding government bond exposure from a risk perspective.” A potential recession should provide an important backstop in the maturity space. “We use the reduction in the HY segment for the increase in the IG segment”, says Gerlinger. “Overall, we are again slightly increasing duration.”

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