Schroeder: It is expected that US interest rates will remain high for a long time, creating potential opportunities in the fixed income sector.

On February 26, Schroders Global Fixed Income Portfolio Manager James Ringer wrote that after the epidemic, inflation is making a comeback, forcing central banks around the world to react, leading to an increase in interest rates. For the first time in modern times, investors are able to generate returns through investing in fixed income. Despite recent rate cuts in the United States, it is expected that rates will remain at relatively high levels for a longer period of time, presenting potential opportunities for investors in the fixed income field. The yield curve shows that expected rates are gradually returning to normal levels. For years, Schroders Global Investments has been predicting a downturn or recession in the US economy, but now, most market commentators, like them, are predicting positive growth in the US economy by 2025. However, there are several known unknown factors causing turbulence in the investment markets. First, the election of Donald Trump as US President and his policies may lead to prolonged high inflation, requiring higher rates to be maintained over a longer period, leading to some market volatility. Schroders Global Investments states that due to high data volatility, interest rate volatility is increasing, mainly due to the economic reopening after the COVID-19 pandemic. This makes investors more sensitive to data releases, leading to rapid changes in investment market trends. It is now seen that just one US employment report can overturn the entire market situation. The second known unknown is the level of government borrowing. For example, the US government debt as a percentage of Gross Domestic Product (GDP) has reached its highest level since World War II, and it is predicted to continue rising in the coming decades. The US is not the only country facing these issues, but it has the largest bond market globally. If debt becomes unsustainable, the bond market tends to punish borrowers. In the long run, both the Trump administration and government debt will lead to higher borrowing costs. However, interest rates are currently on a downward trend. Inflation appears to be under control, and the yield curve has returned to normal levels. The fixed income sector is returning to normal. But there are still significant risks from rising debt levels to economic policies causing inflation. In this fluctuating interest rate environment, Schroders Global Investments believes that a three-pronged approach should be taken when investing in the fixed income market. First is diversification, which may be the most controversial view, as the situation in 2022 indeed casts doubt on this. That year, both bonds and stocks recorded negative returns. However, it can be seen that there is a very clear correlation between stocks and bonds, which is the extent of diversification. The lower the correlation, the higher the diversification. James Ringer believes that stocks and bonds may not necessarily have negative correlation, but their correlation will certainly decrease, allowing bonds to play a better role in risk diversification than they do now. Importantly, diversification actually brings returns. Before the COVID-19 pandemic, bonds as a diversification tool did not bring returns to investors, but they can now. Compared with the expected returns of stocks at high price-to-earnings multiples, James Ringer believes that fixed income itself is a quite appealing investment choice. Lastly, achieving a certain level of excess investment performance through active management. Before the COVID-19 pandemic, central banks around the world maintained zero interest rates. During the pandemic, they all took similar measures, and all economies experienced the same inflation. Therefore, it was difficult to truly distinguish clear differences between the various economies and bond markets. But now, the situations of various economies are vastly different, with varying inflation and growth rates, and central banks in different countries have taken different actions. This presents an opportunity to achieve excess performance by selecting market regions and bond curve sections. Although the importance of the above three situations may vary for different investors, the actual fixed income market environment is more optimistic than many news headlines imply.