How fixed-income investors are navigating a volatile market

As fixed-income investors grapple with a volatile global macroeconomic environment, the need to preserve capital, manage short-term volatility, and meet income demands has become increasingly challenging. In a recent interview with CNBC Africa, Lyle Sankar, Head of Fixed Income at PSG Asset Management, shed light on the current landscape for fixed income investors. The discussion revolved around the key considerations facing investors in the fixed-income market, particularly in light of the current rate hike cycle that is offering high yields. Sankar highlighted the dilemma faced by investors who have been parked in cash, considering the lackluster performance of bonds compared to the cash market over the past year. The central question that investors need to grapple with is whether to move into longer-dated bonds and take on additional risk. Sankar emphasized the potential for bonds to perform well if central banks like the South African Reserve Bank (SARB) were to cut rates in the future, presenting an opportunity for investors to capitalize on potential rate declines. When discussing local government bond markets, Sankar expressed optimism about the yields available to investors, pointing to the attractive 12% average yield on the government bond curve. Despite recent market pressures stemming from Federal Reserve actions and oil price dynamics, Sankar saw the current environment as providing a compelling entry point for investors. He suggested that investors could benefit from the optionality presented by government bonds, with the upcoming budget cycle and potential improvements in economic conditions offering further upside potential. Turning to developed market bonds, particularly the US market, Sankar cautioned against the allure of high bond prices, noting that they may not necessarily represent attractive investment opportunities. He highlighted concerns around inflation, debt sustainability, and the risk of an interest rate spiral in markets like the US. Sankar advised investors to carefully weigh the risks and rewards of investing in developed market bonds, considering factors such as currency exposure and debt maturity profiles. In terms of investment recommendations, Sankar favored the nominal bond market as an attractive option for investors seeking yield. He emphasized the importance of maintaining exposure to government bonds within a multi-asset income portfolio to balance capital protection, income generation, and potential returns above inflation. By strategically positioning investments in the nominal bond market, investors could navigate the current market challenges and enhance their income prospects. Overall, Sankar's insights underscored the nuanced decision-making process facing fixed-income investors in a volatile economic environment. By carefully evaluating the risk-reward tradeoffs across local and offshore markets, investors can position themselves to capitalize on yield opportunities while safeguarding their capital in the fixed income landscape.