Bonds may not be as flashy as tech stocks or crypto, but they’re vital for long-term investors building well-balanced portfolios.
That’s why Brew Markets spoke with Justin Danfield, senior fixed income strategist at Invesco, to understand what’s driving yields and how investors can play the moment.
The following conversation has been edited for length and clarity.
It’s been a crazy first half of the year in terms of the trade war and geopolitical instability. Were you surprised at all by the way yields have moved in different corners of the bond market?
That [Liberation Day] shock in April obviously impacted investors, pushing up the longer end of the yield curve, and you saw credit spreads widen. I wasn’t surprised, because there’s a lot of uncertainty, and investors reacted as such.
For example, high-yield bonds went to 450 basis points above Treasury yields, but now they’re back down to under 300 basis points. As we’ve gotten more clarity, it’s become clear the market has digested a lot of this uncertainty. Investors have gotten back to being more risk-on, especially in credit.
A big concern for bond investors is government debt, and how the “Big Beautiful Bill” would expand the deficit if passed. Do you see that as a long-term threat to the bond market?
Making sense of market moves
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The additional tax cuts to fund it could put upward pressure on the curve, which is obviously going to be funded by more Treasury issuances. Any new suggestion we need to increase Treasury issuance may drive yields higher on the longer end. And we saw Moody’s downgrade the US credit rating.
What’s interesting is that the 10-year has fallen relatively since the start of the year, but the 30-year is relatively unchanged. That’s why investors are staying high in quality, and looking to active fund managers to take advantage of opportunities in the intermediate portion of the curve, or even the short end of the curve.
What are some specific strategies you recommend for investors to set them up for success over the next year?
It makes sense to be up in quality currently. IG corporate bonds have strong technicals and are likely to benefit further from US FED easing expected later in the year. We expect a weaker dollar, thus non US dollar IG credit from developed countries, such as the paper you would get access to in PICB, look attractive. Also, high quality securitized credit, such as Agency MBS, have lagged the market recovery since April and remain attractive, in our view.—LB