In the domestic bond market, short-term debt funds exhibit the most attractive return-to-risk ratio, according to Debt Instruments Management Team director Dariusz Kędziora, CFA, and deputy director and portfolio manager Łukasz Tokarski, CFA.
“The sharp rise in interest rates in 2021-2022 has drastically changed the investment environment in which we operate in favor of bond investors. After several years of interest rates being held at very low levels, there is finally an opportunity for bond funds to fulfill their main function – generating fixed income. Interestingly, according to us, this income does not at all have to be subject to high credit or interest rate risk. So we can say that bond investors have not been in such a good position for years,” according to Kędziora and Tokarski in their analysis “Market Outlook. Scenarios for the markets in the first half of 2023.”
“Given the above, we reiterate our view that short-term debt funds exhibit the most attractive return-to-risk ratio. The scenario presented is an estimate of future performance based on past data, i.e. how the value of investments has changed and based on current market conditions, and is not an exact indicator. The result obtained will vary depending on the performance of the market and the holding period of the investment. And so, in our opinion, at current yields, these products are able to generate high single-digit returns with relatively low risk. This effect has already started to become apparent by the end of 2022, when the funds’ performance improved significantly. In our view, the improvement in performance will continue in 2023, driven by the two main classes of debt instruments that build the portfolios of short-term debt funds – floating rate government bonds and Polish corporate bonds,” they added.
In their view, Polish floating-rate treasury bonds remain an extremely profitable and attractive asset after a year that saw an all-time record discount for this type of paper, and despite a significant price comeback in late 2022.
“Margin levels on bonds with maturities of more than 5 years exceed 100 basis points (1 percentage point) and are higher than the margins observed just a year and a half ago on bonds of high-quality corporate issuers. They may, in the current environment, be an attractive solution for those who want to benefit from high current interest rates on the one hand, and at the same time want to avoid the risk of fluctuations in the valuation of investments, due to the large changes in the level of market interest rates observed on fixed-rate debt, according to the report.
The authors also pointed out that corporate bonds issued in Polish zloty were strongly affected by market perturbations in 2022. This manifested itself in a lack of issuance in the primary market and a tendency to widen credit spreads in the secondary market.
“This took place despite the absence of significant difficulties with bond repayment. The market, observing the economic downturn, pre-emptively priced a much higher risk premium into prices. We remain cautiously optimistic about corporate bonds in our forecasts. We assume that there may be some problems with the ‘rollover’ or repayment of bonds. Nevertheless, the very large risk premium that investors receive here makes it sensible to maintain exposure to this market segment. In doing so, we place a very high value on quality-based selection, i.e. high creditworthiness and creditworthiness of individual rms,” they pointed out.
As for long-term debt funds, Pekao TFI sees them as an opportunity to generate income from the active management process.
“A drop in inations from such high levels as we see at the end of 2022 will certainly still obtrude in surprises, and the risk of inations remaining at elevated levels will ‘weigh on the market’ all the time. In our view, the market is likely to oscillate between a soft and hard landing scenario in the economy. This will probably lead to persistently high price fluctuations. On the other hand, in the long term, the fixed-interest bond class is already attractive, and we rather see opportunities in market fluctuations to take a long position in fixed-interest bonds,” they concluded.
Source: Pekao TFI and ISBnews
