BlackRock believes that continuing to invest in credit markets to generate coupon income is the optimal approach to navigate current market volatility.
Analysts from BlackRock stated in a quarterly fixed income outlook report released on Wednesday that, although geopolitical uncertainties have led many investors to adopt a wait-and-see stance, market volatility is creating opportunities for patient capital, particularly in areas where pricing deviates from fundamentals.
"Due to the level of yields, fixed income assets are experiencing one of the longest periods of elevated returns in nearly two decades and can deliver attractive compound returns," said James Turner, Head of Global Fixed Income for Europe, Middle East, and Africa (EMEA) at BlackRock, in an interview.
The yield on a Bloomberg euro investment-grade corporate bond index is currently around 3.6%, compared to an average of less than 2% over the past decade. Even though European credit spreads have narrowed, returning to levels seen before the Iran conflict, BlackRock still considers the healthy return of coupon income from credit assets as a potentially underestimated driver of returns, rather than relying on price or spread movements.
"The current environment is more normal, closer to what fixed income should be. In fixed income investing, it is no longer necessary to rely on capital gains to achieve good total returns," Turner added.
The report noted that corporate fundamentals are providing support for the market, with issuers adopting a more cautious approach to balance sheet management. This has led to proactive corporate refinancing, a decline in leverage, and healthy profit margins, making widespread rating downgrades or defaults unlikely.
The report also pointed out that, although conflicts have increased uncertainty regarding economic, monetary, and fiscal outlooks, raising risks to growth and inflation, the likelihood of an aggressive interest rate hiking cycle appears low.
"A recession is clearly not our base case, which in itself would limit spread widening," Turner said. "Currently, most investors view spread widening more as a buying opportunity rather than a risk signal."
BlackRock emphasized that, given uncertainties in growth prospects and policy rate paths, active duration management is necessary, with the 2 to 5-year maturity range being the most attractive. For longer-duration assets, the world's largest asset manager holds a more cautious stance.
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