Time to extend from cash to bonds | Insight Investment

After the pandemic, inflation soared, forcing central banks to rapidly raise interest rates as they attempted to slow economic growth and relieve inflationary pressures. Inflation peaked in 2022 and then started to slowly trend downwards, declining towards the 2% level that most central banks use as a target.

With overnight rates well above inflation, central banks have grown more confident that policy can be eased, and the European Central Bank was the first major central bank to cut rates in June 2024. A series of rate cuts are now expected through the rest of 2024 and start of 2025.

Although the yields of longer-maturity corporate credits have declined from recent highs, they remain at the higher end of the range relative to the last decade, especially in the US which is the largest and deepest corporate bond market.

Figure 1: Corporate yields remain close to multi-year highs

Source: Bloomberg and Insight, data as at 31 August 2024.

When we look back at historical easing cycles, we can clearly see that these have been overwhelmingly positive environments for bond markets. During these periods income and capital gains combine to drive returns, with the potential for active alpha to further enhance performance.