Don’t Miss the Return Opportunity in Fixed Income

Given the current economic backdrop, where can investment opportunities be found, particularly within the fixed income asset class? Head of Franklin Templeton Institute Stephen Dover shares his key takeaways from a panel discussion that he moderated with fixed income experts within the company.

Global capital markets have seen strong performance in 2023 despite the backdrop of economic challenges. What are the investment opportunities going forward? Why is fixed income corporate credit offering particularly attractive opportunities right now? I discussed these issues with a group of fixed income experts within Franklin Templeton. Here are my key takeaways from the discussion:

Move out of cash and into fixed income. While interest rates on cash are high, fixed income instruments provide similar yields with the added benefit of higher future total returns if interest rates decline. Given the current dynamics, the panel thought this was a good time to lock in current interest rates.

Corporate bonds show solid fundamentals. Current leverage, interest coverage, free cash flow and amortization schedules are at stronger levels than in the recent past. Focusing on higher-quality instruments allows portfolios to capitalize on generous current yields, income that could help weather economic storms should the economy weaken further than we expect.

Companies re-financed at low rates during the pandemic, avoiding the need to refinance at today’s higher rates. This may have contributed to the lower impact of the Federal Reserve’s rate hikes as companies do not need to refinance. Many companies may need to refinance by 2025, and thereafter, but we expect rates to decline before then.