'Government bonds offer portfolio stability'
"In investment grade credit with careful selection one can still achieve attractive returns"
Key points
- The war in Iran adds yet another element of uncertainty to the markets. How do you assess the bond market and what could be the main macroeconomic risk in both Europe and America?
- How can you protect your bond portfolio from volatility?
- What issues are suitable for an investor with medium risk appetite and 5-year horizon?
Among the indications for the bond portfolio provided by Mauro Valle, head of fixed income at Generali Am are government bonds and investment grade credit.
The war in Iran adds yet another element of uncertainty to the markets. How do you assess the bond market and what could be the main macroeconomic risk in both Europe and America?
After a period of low volatility due to stable monetary policies as a result of the downward trend in inflation, interest rates have risen again in recent days due to the war in Iran. The market is trying to assess how long the US operations will last and whether the conflict will remain regionally limited or spread further, signalling a longer period of instability with possible repercussions on global growth prospects and energy prices. In the most favourable scenario, characterised by a short and regionally limited conflict, US rates around 4% would represent a neutral level. However, in the presence of a marked increase in risk aversion, yields could fall sharply. The recent increase in energy prices, both oil and natural gas, has rekindled fears of a resurgence of inflationary pressures, which could influence the monetary policy of both the ECB and the Fed. In the coming weeks, the main element of uncertainty will be the depth and duration of the current international tensions and their possible impact not only on prices, but also on the risk of a slowdown in economic growth.
How do you think rates will move in the coming months and with what implications for investors?
The scenario has become more complicated with the latest geopolitical events and the development of rates no longer depends only on macroeconomic variables. If energy prices stabilise after the recent surge, it is believed that German rates may continue to move in the range of recent months. Bund rates above 3% would not only make economic recovery in the eurozone more difficult, but would also mean real rates around 1%.
Is inflation still under control?
In Europe the disinflation process was consistent with ECB projections, and there was a risk of inflation below the 2% target. Now these expectations are in doubt but not yet to be ruled out until there is clarity about the impact of the Middle East crisis on energy prices. In the US inflation is still relatively high and the latest economic indicators are not unambiguous in predicting a fall in prices in line with Fed targets in the short term.
Which segments of the bond market offer the best risk/return ratio?
Government bonds are always a key component for providing portfolio stability during periods of market volatility or risk-off phases. The intermediate maturities on the curve provide a good balance between interest rate risk exposure and yield, thanks to the slope of the curve itself. In credit, despite spread compression and more limited opportunities, careful selection still allows for attractive returns.
