La Française AM: Low risk fixed income assets offer opportunities
Financial conditions are already very tight. There is a possibility that central bankers tighten too much in the near future.
‘Commodity prices are of utmost importance this year, and especially energy prices’, said François Rimeu, Senior Strategist for La Française AM, today. ‘Oil and gas prices have been coming down significantly over the last 6 months, helping inflation to come down from the very high levels reached this last year. If energy prices were to surge again, it would complicate a lot the job of central bankers and lead to higher rates across the board. It would affect negatively all fixed income assets and probably also equity markets.’
‘Central banks tightened financial conditions very quickly in 2022’, he continued. ‘We know there is a lag between central bank actions and the consequences on the economy, but the time-lapse of this lag is variable. Looking at the last surveys published by both the Fed Reserve Board and the European Central Bank (Senior Loan Officer and Bank Lending Survey), it seems that financial conditions are already very tight. There is a possibility that central bankers tighten too much in the near future, leading to a recession. A ‘soft landing’ is very hard to achieve historically.’
Low risk fixed income assets offer opportunities
‘Over the long term, we think that low risk fixed income assets offer opportunities currently’, said Rimeu. ‘Investment grade securities are currently yielding around 4% in euros, with a very flat curve. Ten-year inflation swaps are currently around 2.40%, meaning that you have a ‘real’ yield of 1.6%, which is historically high. As we do not believe that high inflation is sustainable over the long term, we think that low risk fixed income assets could offer favorable risk / reward characteristics. This could be especially true for financial debt, considering how banks have become more solid since the 2008 crisis.’