Bond investors’ good fortune continues – lower policy rates create favourable conditions for fixed income investments

EVLI PLC PRESS RELEASE OCTOBER 29, 2024, AT 7:07 AM (EET/EEST)

Bond investors’ good fortune continues – lower policy rates create favourable conditions for fixed income investments

According to Juhamatti Pukka, Head of Fixed Income at Evli Fund Management, the market for fixed income remains very interesting as the ECB's rate cuts seem ready to gradually continue. Moderate economic growth and a positive outlook for corporate bonds also create favourable conditions for fixed income investments. Fixed income offers valuable opportunities from both a return and diversification perspectives, and its role in a balanced portfolio is undisputed.

The European Central Bank is expected to continue cutting policy rates through 2025, with little chance of a return to the negative rate era and the ECB's policy rate expected to remain in the range of 2-2.5% over the longer term. Although interest rates have fallen from their peak in 2023, with policy rates starting to fall in the summer of 2024, there is still scope for investors to benefit from falling interest rates.

"We expect interest rates to fall gradually over the coming months. However, it is unlikely that we will return to a negative rate environment. The current interest rate situation is positive for both investors and economic stability. A moderate level for rates supports economic growth but does not lead to excessive risk-taking or asset bubble formation. There is still a lot of potential in fixed income investing. Investors who are able to hold their investments for the long term can benefit from both interest income and potential capital appreciation," says Juhamatti Pukka.

Market conditions can fluctuate - diversification is key

However, global economic uncertainties, such as geopolitical tensions, can lead to market volatility.

"A moderate level of interest rates supports economic growth without encouraging excessive risk-taking, and moderate economic growth is generally a supportive environment for fixed income investments. Inflationary pressures remain under control, while corporate profitability remains good. That creates a positive outlook for corporate bonds. Corporate balance sheets are healthy, profitability is good and refinancing risks are low," concludes Pukka.

As always, even in the current market environment, fixed income investors should diversify and aim for returns that match their risk profile.

"In the current interest rate environment, high-yield funds with lower-rated bonds are doing very well if you can tolerate a slightly higher level of risk in fixed income. Because they have a higher risk of companies defaulting on their debt compared to the investment grade funds with higher-rated issuers, they also offer a higher level of yield. Because the fund is invested in a wide range of bonds, the potential default of a single investment is not that much of a hindrance to performance. Nordic corporate bonds are also very attractive at the moment. A special feature of the Nordic market is that many companies do not have an official credit rating and therefore pay a higher coupon rate on their bonds than the credit risk of the company would typically require. This in turn means extra yield for the investor," says Pukka.

In a falling interest rate environment, longer-term investments offer better return possibilities - but a longer time horizon also increases the risk of a rebound higher in interest rates. So, it is also worth diversifying geographically and across sectors. In addition, emerging market corporate and government bonds can provide additional return potential.

”Investing in fixed income is a long-term activity”

In a recession, government bonds often benefit from falling interest rates as investors gravitate towards safe-haven investments. Historically, fixed income investments have provided a hedge against drops in the stock market. For example, during the 2008 financial crisis, when global equity markets fell by more than 40%, high quality government bonds delivered positive returns. This negative correlation between equities and high-quality bonds is a valuable feature for portfolio risk management.

"Fixed income investing is a long-term activity that requires active monitoring of the economy. A falling interest rate environment is favourable for fixed income investing because as interest rates fall, bond prices rise, thereby increasing total returns. Investors who are able to hold their investments for the long term and benefit from both interest income and potential capital appreciation will do best," says Pukka.

Despite the positive outlook, Pukka says it is important to consider the key risks of fixed income investing - interest rate risk, credit risk and liquidity risk.

● Interest rate risk is the risk that an unexpected rise in interest rates will cause bond prices to fall. This risk can be managed by diversifying over time and by spreading investments over different maturities.

● Credit risk refers to the ability of the issuer to service the debt interest and repay the principal. This risk can be mitigated by diversifying investments across issuers and by focusing on issuers with higher credit ratings.

● Liquidity risk is the risk that an investment cannot be sold quickly without a significant loss in value. This risk is lower for large government and large corporate bonds but may be different for smaller corporate or emerging market bonds.

"It is important to diversify in a way that suits your risk profile. The key to investing in fixed income is careful risk management. Past performance is no guarantee of future performance, but it does help to understand how the market will behave in different situations. Investors should therefore turn to experts to help them design an appropriate fixed income investment strategy," concludes Pukka.

Season 2 of Evli's popular podcast, Kaikki Koroista (All About Fixed Income) is out now!

What should every investor know about fixed income? This podcast provides a comprehensive overview of fixed income investing for those of you looking for the opportunity to achieve lower risk and more secure returns. Join in with experts from Finland's most experienced fixed income house and well-known investors. The podcast is hosted by media entrepreneur and Youtuber Jalmari Karvinen. Episodes are released every Wednesday on Spotify and YouTube.

The podcast is produced by Evli. Listen to the podcast (in Finnish) here.

EVLI PLC

Additional information:
Juhamatti Pukka, Head of Fixed Income, Evli Fund Management Company Ltd

tel. +358 40 593 3503, juhamatti.pukka@evli.com

Evli Plc

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¹ Morningstar Awards 2024 (c). Morningstar, Inc. All Rights Reserved. Awarded to Evli for the Best Fund House in Finland and Sweden. Lipper Fund Awards 2023, 2024, the category Small Fund Companies.
² Kantar Prospera External Asset Management Finland 2015, 2016, 2017, 2018, 2019, 2021, 2022, 2023, 2024. Kantar Prospera Private Banking 2019, 2020 Finland.
³ SFR Scandinavian Financial Research Institutional Investment Services Finland 2021, 2022. Kantar Prospera External Asset Management 2017, 2018, 2019, 2020, 2023, 2024 Finland.


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