Investor sentiment remains highly fragile amid fears over the global growth outlook and in the wake of the sudden collapses of Silicon Valley Bank in the US and Swiss banking franchise Credit Suisse.

Authorities intervened with pledges of support to shore up confidence in the capital positions of both banks. But the two situations unraveled rapidly, to the point that authorities had to resort to emergency takeovers by direct competitors to prevent further financial market fallout.

Overall, market participants viewed these events as idiosyncratic rather than systemic. Nonetheless, they have caused investors to fret about the health of the global financial system.

As part of the deal to save Credit Suisse, the Swiss government wrote down the value of its additional tier 1 (AT1) bonds – wiping out the investments of these bondholders and sparking a sell-off across the capital structure. It furthers strengthened investors’ appetite for yield with a reliably low level of risk.

A confluence of factors means that current yields on high-quality, short-dated government bonds in developed markets are near their highest in more than a decade – making now an opportune time to invest.

Why now?

For some time it has been apparent that 2023 had the potential to become an inflection point for bond investors. Years of extraordinary monetary accommodation had suppressed bond yields to historic lows, making the short-end of developed market government bond curves very unattractive.

One consequence of prolonged low interest rates across major developed markets was to stimulate economic activity, eventually leading to a rise in inflation. Additional factors such as the Russia-Ukraine conflict also contributed to commodity price pressures.With inflation levels reaching record highs across multiple countries, policymakers have intervened over the past year with a series of interest rate hikes to tame inflation. The impact of this has driven up bond yields dramatically.

Source: abrdn, Bloomberg, March 2023. For illustrative purposes only. No assumptions regarding future performance should be made.

This sharp move in yield curves has meant that sovereign bond issuers in major developed markets are paying more to borrow over the short term than over the long term. In effect, investors are getting paid more to take on less risk. The short-end of the yield curve has rarely been so exciting, and the repricing of assets has created an opportunity for investors.

Source: abrdn, Bloomberg, March 2023. For illustrative purposes only. No assumptions regarding future performance should be made.

Looking ahead, high borrowing costs have added to the financial pressures facing companies and consumers, with many developed market economies confronted by the prospect of recession. This recessionary backdrop, allied to a decline in headline inflation that points to a peak having already been reached, creates an environment for central banks to stop hiking rates.

If this economic scenario plays out, the policy hawkishness we are experiencing now will likely evolve to the point that we could expect rate cuts in some markets during the second half of this year.

Although these cuts may not materialise until late 2023 or early 2024, financial markets are forward looking, so investors will price the cuts in advance before central banks lower rates. This creates a golden opportunity for bond holders to lock in the higher yields before they start to decline again.

Why investors should consider a FMP

To capitalise on these once-in-a-generation market conditions, investors can consider a high-quality, short-dated fixed maturity product (FMP).
With a defined maturity date, FMPs provide investors with a predictable income stream and a high level of certainty around returns – with capital preservation as one of the utmost priority. An FMP typically has a predetermined average credit rating such as investment grade –

ensuring a good credit profile and to lower the risk of default. This can meet investors’ need for reliable income stream with a lower level risk.

A fixed maturity bond fund typically invests in a portfolio of bonds with similar maturities close to that of the fund. This allows investors to lock in potential income until maturity. A diversified portfolio of bonds can also help to minimise default risk.

In a nutshell: Benefits of investing in an FMP