26 Jul 2023
Following successive rate hikes by major central banks during 2022 and H1 2023, deposit rates in many developed markets (DM) have become more attractive. The hawkish moves by key DM central banks have also pushed bond yields higher.
While short-term investments, such as time deposits and short-term funds do have their benefits within a portfolio, global investment grade (IG) corporate bonds may be preferred due to the following reasons:
Based on data from 2000 onwards, bonds have generally outperformed cash once policy rates have peaked because of the higher rate sensitivity of the asset class. Although tempting, higher yields on cash and short-term bonds come with an opportunity cost of missed returns during periods of looser monetary policy, and/or recessions, as yields often decline when central banks ease monetary policy.
Accessing global IG bonds through mutual funds allows investors to participate in a diverse portfolio, holding a range of securities from many different issuers and maturities. This reduces the effects of specific risks linked to individual issuers/bonds and can help in better preserving capital, generating returns and ensuring liquidity compared to holding a single security. Nevertheless, investors should also be mindful of the risk of losing their capital when investing in mutual funds and the costs incurred for investing in these funds.
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