Are bonds the opportunity you can’t afford to miss right now?
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Inflation indicators are starting to cool, several central banks have already cut rates – but bond yields are still higher than they’ve been in a decade.
Early movers started their shift back to bonds last year, propelling global bond ETF inflows to a record $333 billion in 2023.1 But many investors are still significantly underweight bonds, with an average EMEA allocation of just 25%.2
So, with the bond market regaining momentum, should you be jumping back in now?
Why Bonds? Why Now?
Falling inflation means the world’s major central banks have probably reached the end of their aggressive rate-hiking—a cycle that made cash king for a time. That reign looks to be drawing to a close.
Central banks will inevitably take us back to a less restrictive monetary environment when they can, and some, like the European Central Bank and the Bank of England, have started cutting rates already.
Setting aside the exact timing of future rate cuts, the bottom line is this: current bond yields offer a potential opportunity to get in ahead of change. Yields tend to fall alongside or ahead of rate cuts – but volatile data have kept them higher than we might expect. So, while rates are clearly trending downwards, inflation's uneven descent has provided a potentially attractive entry point for bond investors.
Ready to rethink your portfolio?
Over the past few years, market volatility drove many investors to the safety of cash and cash-like investments.
The flows showed clear evidence of a flight to safety: over $1 trillion poured into money market funds worldwide in 2023. By year-end, assets in these funds had hit $9.2 trillion, up 19% from the previous year.3
But cash doesn’t, and can’t, provide the same diversification or growth potential as fixed income. Bonds have long played two key roles in a balanced portfolio: generating income and offering a hedge against riskier assets like equities. And with cash yields falling already, that income and hedging power is looking very attractive.
Despite all the factors in its favour, many investors are still significantly underweight fixed income. The average investor in EMEA has a 25% allocation, down from 30% at the start of Covid-19 in March 2020. That’s well below the 40% held in a traditional 60/40 (equity/bond) ‘balanced’ allocation.
How to Get Back Into Bonds
How could you get back into bonds? One of the most effective ways could be with a bond ETF.
These funds offer a versatile and efficient way to gain exposure to everything the bond market has to offer, from broad-based exposures to much more targeted ones.
Bond ETFs have become the go-to strategy for investors. As of July 2023, they had over $2 trillion in assets – and we believe that could triple to $6 trillion by 2030.4
