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Diversified Fixed income Portfolios

Yield levels of most fixed income asset classes remain attractive from a historical point of view 

  • +5%

    Average initial yield of investment grade Corporate bonds, in terms of yield to worst
    Source: Bloomberg, as of 29/04/2024. YTW Bloomberg Global Corporate Index.

  • +80%

    Historical correlation between the bond's initial yield and the return over the next 5 years
    Source: Morningstar Direct and Santander

  • 5-6%

    Potential opportunity cost of being in cash throughout a cutting rates cycle
    Source: Calculations by Santander (see example inside)

Eleven months ago we published a note where we discussed about the opportunity of increasing duration in fixed income portfolios as interest rate hikes were coming to an end and existing yield levels were mitigating possible further hikes and as we discussed in our Quarterly Market Outlook: Q2 2024, "Softer landing moderates rate cuts", rates will be reduced, but only moderately. 

This moderation in rate cuts is putting pressure on government debt in particular, with the result that several indices entered negative territory in April. Despite all the volatility caused by the monetary policy debate, the fact is that, at current levels, most fixed income asset classes have attractive yields in historical terms. 

Historical yields of the different Fixed Income asset classes

The initial level is important

As we have seen, yields on the various fixed-income asset classes are close to their 10-year highs. History shows that, in fixed-income, initial yields (in terms of Yield to Worst) are a reasonable estimate of expected returns for the next 5 years.

By analysing historical data on initial yields of the various indices and how they performed over the following 5 years, we find correlations of over 80% in most asset classes. In those cases where the correlation falls below 80%, it is because the asset suffered especially during the rate hikes of 2022 and 2023, as is the case with emerging debt

Money market assets at record highs

The conventional tendency to accumulate cash in periods of uncertainty has been reinforced in the last two years as rising interest rates have increased the attractiveness of investing in cash compared to other fixed income options. In fact, at the end of March 2024, positions in U.S. money market assets exceeded USD 6 trn, an all-time high. This trend was also in evidence in other geographies such as the euro area.

Evolution of US Money Market Assets

How to take advantage of this interest rate scenario?

We believe that the best option is always to build a diversified portfolio that can give us access to all asset classes while controlling exposure and the risk assumed.

To do so, we recommend that you contact your financial advisor and select a portfolio with several flexible, global strategies that use complementary approaches in a way that suits your risk profile.

Important Legal Information
This document has been prepared by Banco Santander, S.A. ("Santander") for information purposes only and is not intended to be, and should not be construed as, investment advice, a prospectus or other similar information material. This material contains information compiled from a variety of sources, including business, statistical, marketing, economic and other sources. The information contained in this material may also have been compiled from third parties, and this information may not have been verified by Santander and Santander accepts no responsibility for such information. Any opinion expressed in this document may differ from or contradict opinions expressed by other members of Santander. The information contained in this material is of a general nature and is provided for illustrative purposes only. It does not relate to any specific jurisdiction and is in no way applicable to specific situations or individuals. The information contained in this document is not an exhaustive and formal analysis of the issues discussed and does not establish an interpretative or value judgement as to their scope, application or feasibility. Although the information contained in this document has been obtained from sources that Santander believes to be reliable, its accuracy or completeness is not guaranteed. Santander assumes no responsibility for the use made of the information contained herein.