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Investment Grade offers plenty of opportunities to put cash to work

Strategy  —  01/02/2024

Emmanuel Petit

General Partner, Head of Fixed Income

Investment Grade offers plenty of opportunities to put cash to work

After a major rally on the fixed-income markets in November and December, January followed the same trend. While the Fed's dovish turn(1) has been reflected in the publication of its dot plots, which point to a 75bp rate cut in 2024, the "perfect landing" scenario, in which inflation returns to target without a period of recession, is reflected in investor expectations. At the end of December, up to six Fed rate cuts of 25 basis points (bps) were envisaged for 2024(2).

This optimism has been somewhat tempered since the beginning of 2024, particularly by central bankers. Indeed, it is unlikely that in a context characterized by such a resilient economy in the United States and tensions on the labor market in Europe, compounded by a slowdown in productivity, that central banks would cut rates to such an extent and so soon. Indeed, markets have revised some of their expectations, which has pushed up long rates by 25-30 bps(3).

Sovereign rates are therefore under slight pressure. Credit spreads(4), on the other hand, continue to perform well on Investment Grade(5) and especially High Yield(6). Their respective performances since the start of the year are -0.35% and +0.77%(3). We believe, however, that investors are being over-optimistic in their expectations of interest-rate cuts in 2024, and that the timing is too early. We still see the current investment window as favorable for maturity funds, as the carry should support the performance of the Investment Grade segment throughout the year.

The current entry point is therefore an attractive one for buy & hold(7) strategies, which are set to benefit from this carry, with yields not seen since 2011(3). More specifically, the market environment seems to us to be confirming the return of attractive yields for Investment Grade issuers. What's more, this type of strategy makes it possible to remain relatively prudent, avoiding the excess volatility potentially generated by a recessionary cycle or the publication of macroeconomic data throughout 2024.

Moreover, the probability of default in this segment over a five-year horizon remains low. As the pool of issuers with sound fundamentals is currently rich, this context makes it possible to carry out high-quality bond picking(8). It is in this environment that we have launched our exclusively Investment Grade fund, R-co Target 2029 IG. It will be marketed until December 31, 2024.

(1) Positioning in favor of a less restrictive monetary policy.
(2) Source: consensus, January 2024.
(3) Source: Bloomberg, 01/31/2024.
(4) Yield differential between a bond and a loan of equivalent maturity considered "risk-free".
(5) Debt securities issued by companies or governments rated between AAA and BBB- by Standard & Poor's.
(6) High-yield bonds are issued by companies or governments with a high credit risk. Their financial rating is below BBB- on the Standard & Poor's scale.
(7) Strategy of holding securities until maturity.
(8) Selection of securities.