(Bloomberg) — Investors should buy bonds now because it’s the “most attractive point” in years, according to senior investment executives at T. Rowe Price Group Inc., manager of $1.4 trillion in assets.
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Bond yields will continue rising over the medium term to reach levels offering attractive income opportunities for investors who understand how to manage duration, or the sensitivity of a bond’s price to changes in interest rates, said Arif Husain, head of international fixed income and chief investment officer.
Debt prices have plummetted this year as the Federal Reserve carries out a regime of rate increases to stem the hottest inflation in decades. The Fed on Wednesday announced a 75-basis-point increase in overnight lending rates, the third time it’s raised rates in 2022.
“We think that over the next several quarters investors may want to consider adding duration,” wrote Husain in the firm’s 2022 midyear market outlook published on Wednesday.
Corporate high yield bonds already may be a buy, added Husain. Some BB-rated bonds, the safest part of the junk-bond market, are priced at 80 cents on the dollar, levels that “historically have proven to be good buying points,” said Husain.
An uncertain economic outlook, however, means junk investors need to be cautious. “The threat of recession is real,” said Husain.
Borrowing costs continue to rise amid worries about slowing growth and tightening financial conditions. Yields on U.S. junk bonds closed at a two-year high of 8.49% on Tuesday, while yields on the benchmark Bloomberg high-grade index closed at 4.99%, levels last seen in the depths of the global financial crisis and higher than the 4.58% rate in the March 2020 pandemic rout.
Read more: US Investment-Grade Bond Yields Surge to the Highest Since 2009
Duration management and yield curve positioning are important tools for handling risk, especially in a volatile market, according to the money managers. Some investors are already finding great deals in securities maturing decades from now, enticed by prices that have fallen in some cases into the 60-cents-on-the-dollar range.
The longest-term bonds now offer higher yields after sinking about 24.5% on a total return basis this year, pushing a Bloomberg index for the sector to an all-time low.
Read more: ‘Deep Discounts’ in Very Long-Term Corporate Debt Lure Investors
For U.S.‑based investors worried about rising rates, global markets could offer diversification potential, given that other countries are further along in their interest rate cycles. Husain finds emerging market bonds denominated in US dollars particularly attractive, but says both country selection and underlying security selection “will be critical.”
The T. Rowe executive also said the Fed will continue tightening until it has pushed its key market rate, the federal funds rate, into positive territory in after‑inflation terms, leaving considerable room for further rate hikes.
“I don’t think we’re quite at the peak for yields,” Husain said.
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