Investors are increasingly favouring fixed income over equities as the macro environment fosters an attractive entry point into the asset class, according to Interactive Brokers’ head of fixed income, Joe Burke.
The US-based brokerage firm has seen trading in the asset class on its platform increase significantly over the past year. The volatility experienced during that period has set up an attractive entry point for investors, as rising interest rates have left yields looking increasingly attractive.
Burke said: “We’re probably looking at two more Federal Reserve hikes of 25bps each, possibly more. That puts corporate bond yields at a level that are fairly attractive, historically speaking, and I would expect that both corporate bond buying and sovereign debt trading will continue to be robust.
“With corporate bonds, we’re seeing quite a bit of growth, while we’re also seeing massive growth in treasuries. Fixed income wasn’t really all that interesting prior to March 2022, but with the increase in interest rates we’re seeing it as a much better option than it was previously,” he added.
“When you were looking at equities versus bonds a year ago, there wasn’t much of a choice. But now, I think bonds are becoming a preferred asset class.”
The company’s chief strategist Steve Sosnick (pictured) added: “When you think about the asset allocation idea between stocks and bonds, what drove much of the investing strategy through late 2020, and in through pretty much all of 2021, was that there is no alternative.
“Once the Fed started raising rates, there were alternatives – and there are clear alternatives. So, I think that has changed and has gotten people to think, first of all, that there’s value in cash, when previously cash was punitive. I’d still argue it’s potentially less punitive, but if inflation is backing off, we may actually even be able to see a real yield in cash.
“As a result, [investors] are thinking more broadly. Rather than just chasing equity performance, they realised there is a lot of value in fixed income potential.”
Retail investors are being rewarded for investing short
Investors currently favour short-duration bonds as the tradition of institutional investors buying long-term persists.
Addressing the current state of play in the asset class, Sosnick said: “It’s an inverted yield curve. You’re being paid to invest short, which is not a bad thing. Of course, if you’re investing short term, two years or less, you have to worry about re-investment risk. But you’re being compensated for that right now by sticking to the shorter end of the curve.”
Burke added: “We have seen volumes grow dramatically in the past year. I would like to attribute all of that to our wonderful bond offering, but I think interest rates may have had some part to play in that. I see growth continuing [in 2023].
“Utilities look attractive here, with the issues that tech is having as far as layoffs are concerned – their stocks getting beaten up, while bonds are getting beaten up. Maybe at some point those will become interesting plays, assuming that the fundamentals remain constant. Generally, look for out of favour opportunities.”
See also: Fixed income allocations set for ‘significant’ changes in 2023
