Current volatility is creating an attractive setting for active managers
The current interest rate environment is presenting more opportunities in fixed income than have been seen in many years, according to Chris Metcalfe, CIO of IBOSS.
Year-to-date, barring index-linked bonds, many fixed income indices have posted marked gains, with the IA Sterling High Yield, Sterling Strategic Bond and Sterling Corporate Bond sectors all delivering returns in excess of 4%.
In conditions where volatility is set to remain, paired with higher yields, Metcalfe said the best way for investors to capture these returns, is through actively managed fixed income solutions.
“We have long maintained that the fixed income environment is likely to remain volatile going forward,” he said.
“This volatility, paired with higher yields, creates an especially attractive setting for active managers who can both harvest yield and trade volatility even if overall yields or interest rates don’t see significant changes.”
For Metcalfe, not only does fixed income once again offer a meaningful yield, he said it also appears better positioned as a diversifier against other risk assets. However, he added the scars from previous shocks remain.
“The 2022 rate-driven sell-off — exacerbated in the UK during Liz Truss’s brief premiership — continues to weigh on investor sentiment, particularly among those with heavy sovereign bond exposure, which is still recovering from losses,” he said.
“With US debt levels at, or near historic highs, questions persist around whether future instability could trigger further bond market dislocations.”
Nonetheless, Metcalfe said IBOSS remains constructive on fixed income as an asset class, albeit with a “heightened awareness of fast-moving macroeconomic and geopolitical developments”.
“This outlook supports our preference for active managers, who have shown their value in navigating a rapidly changing backdrop,” he said.
“In recent months, US treasury yields have periodically edged higher amid increased supply and softer auction demand,” he added, “Japanese government bonds [JGBs] and UK gilts have faced similar pressures, with domestic auctions in both regions reflecting lower investor appetite, resulting in a shift toward shorter-duration issuance in the UK.”
Amid these headwinds, Metcalfe noted the best active bond managers have consistently outperformed passive strategies, while allocations to corporate and emerging market bonds have also contributed positively to overall portfolio returns.
“Significantly, recent bond market dislocations — driven by erratic policy movements, inflation concerns, and geopolitical uncertainty — have widened the performance gap between passive and active strategies,” he said.
“Managers with the flexibility and insight to respond to interest rate changes, sector rotations, and shifting central bank rhetoric are increasingly able to exploit inefficiencies that passives cannot.
“The higher rate regime may bring more volatility, but it also brings renewed opportunity. For investors focused on selectivity, adaptability, and long-term resilience, active fixed income remains a compelling investment option.”
