“No one is anticipating the kind of increase in rates that we saw in in 2022 and that’s good news for the bond investors,” said Chris Iggo, chair of the Axa IM Investment Institute and CIO of Axa IM core at Axa Investment Managers, during a presentation in December 2024 in Luxembourg. As a result, the attractive yield enabled investors to “really focus on income” in a bond portfolio. Consequently, he thinks that most of the return will come from income, and that is “a very important message in terms of portfolio construction for 2025.”
Moreover, the extra return of lending money to companies rather than to governments will continue be a key driver of overall fixed income returns. In fact, AxaIM prefers the high yield sector, the weakest part of the corporate fixed income spectrum.
Mixed messages on corporate bonds
Despite the gloom around the GDP outlook in Europe, AxaIM does not expect “any significant deterioration” in underlying fundamentals for corporate credit on the back of an efficient management of their leverage ratios, helped by lower borrowing costs which also reduce the refinancing risk. Iggo thinks that investors can still pick up bonds that provide 100 basis points or more relative to the government interest rate yield curve. Consequently, he still sees a potential for excess return despite low absolute yield levels and “we have a preference for high yield in the fixed income markets.”
You don’t have a lot of additional spread in a corporate bond portfolio should something go wrong
Given the compression of credit spread observed in the last year (“very, very low end of historical range”), Iggo stressed that in general, “you don’t have a lot of additional spread in a corporate bond portfolio should something go wrong,” such as if growth disappoints or on the back of external shocks leading to a risk off episode.
In terms of corporate sectors, Iggo explained that AxaIM has been underweight whereas they have held an overweight position in the banking sector.
A credit universe in the govie world
Given renewed concerns about fiscal policy, he thinks it may play a role on the performance of long-term government bonds which is considered, overall, as “fairly valued.” There are exceptions. For instances, Iggo thinks that French, Italian and Spanish bonds offer yields close to the corporate credit market.
That may change even on the German bund yields. Indeed, he noted that the market has started to price in an expansionary fiscal policy at ”the very far end of the curve” with “a little bit of a higher yield relative to the swap market.”
Long-term US treasuries may be on the wake of a rough ride
“Our global bond team is not taking a big bet on the direction of long-term interest rates going into 2025,” stated Iggo. AxaIM has adopted a wait-and-see approach as it awaits the “sequencing and the severity of Trump’s policies.” The firm is concerned about the inflationary nature of tariffs and the increased supply of US treasuries.
“The short duration has proved to be a better bet in terms of risk-adjusted returns,” observed Iggo. He acknowledged that income is lower but accompanied by “much lower volatility” than the long end of the curve.