We prefer to make money”: why “buy” fixed income securities in a high rate environment?

As they explain in one of their latest reports, they advise fixed income because “.we don’t expect central banks to make any major rate cuts this year.We prefer to derive income from short-term bonds, corporate debt with high credit ratings and government mortgage securitizations.

This week is marked on investors’ calendars precisely because of major central bank events: This Wednesday there is a Fed rate meeting, and Thursday is the turn of the ECB and the Bank of England (BoE)..

“The major central banks will raise interest rates again this week and keep them at high levels, contrary to the cuts that the markets are anticipating this year. This mismatch will be resolved on the higher rate side.we believe,” BlackRock strategists point out.

They believe that Inflation will “decline rapidly”, but they estimate that it will “remain above the target” of 2%. and will therefore keep rates higher for longer than the market expects. “Persistently high rates” and political wrangling over raising the US debt ceiling are “risks” best left unaddressed at times like this.

“Short-term government bonds and investment grade (IG) bonds are now offering some of the highest yields in two decades. ” At this moment we prefer to derive income from these high quality fixed income assets.as rates rise and stay high,” analysts note.

They insist that “The appeal of fixed income securities remains intact as long as central banks keep rates near their peak. »They point out that the lack of duration – or the sensitivity of bond prices to interest rates – in short-term paper “also helps preserve income even if yields go up”.

As BlackRock explains, IG Global Credit “offers quality, liquid income, and we believe that the strong balance sheets of high-quality companies that have refinanced their debt at lower rates can withstand the mild recession we anticipate. . But they also like agency mortgage-backed securities (MBS) to “diversify income.”

“EXCESSIVE” TIGHTENING.

“We see the major central banks in a the path of over-tightening of politics because they are concerned about the persistence of core inflationexcluding food and energy prices,” BlackRock strategists say in the report, in which they point out that recent data from the United States and the Eurozone is not enough.

In their view, “Central banks will want more evidence that core inflation and wage pressures are falling sustainably before it is concluded that core inflation and wage pressures are in decline. decrease. declare victory over inflation and consider easing policy.“. And this is something, they say, “that will take a long time.” In fact, they dare to venture to say that “It’s unlikely to happen this year.”.

After the rate hikes expected this week on both sides of the Atlantic, BlackRock considers further hikes to be “likely” in the coming months. And after central banks will “keep rates high”.. But markets are pricing in rate cuts in 2023, even as the Fed and ECB “insist that they will stay the course.”

This disconnect “must be resolved”, but the outcome may not be to EU liking. the markets anticipate a rate cut by the end of the yearThese analysts, who also speak in detail about the American indebtedness and the problems it could cause, comment. The country reached its debt ceiling this monthThe government’s decision to buy treasury bonds could cause investors to ask for a term premium again.

There will be negotiations that could stretch into the summer to see whether the borrowing limit is raised or not, although “eventually we expect a resolution”, say the fund manager’s experts. In any case, they warn: A new “impasse” on the debt ceiling could also put pressure on risky assets.as in the previous episodes, which allows us to Caution on US stocks“.