The various themes playing out in the markets have affected asset classes in different ways. While ‘defensive’ assets such as government bonds have rallied, and are priced at or below their past three years’ yield average, corporate bonds and emerging markets have cheapened considerably.
Valuation in fixed-income markets has stretched since the start of 2015 and one has had to be careful about prospective returns.
The third-quarter sell-off, though, gives investors an opportunity to increase credit risk exposure at lower prices. The renewed optimism in markets since the start of October should lead to increased holdings of corporate bonds in portfolios, which should help investors recapture some of the negative performance from the past two months.
On the other hand, interest rate risk remains, especially in the US, where fundamentals do not warrant such high prices for government bonds.
