Articles & Interviews

The Return of Attractive Real Yields

In their fight against post COVID-19 inflation surge, Central Banks over the world have embarked on an aggressive tightening of their monetary policies. As a result, inflation dynamic has materially turned at the end of 2022, and current underlying trends are pointing towards inflation levels returning decisively towards the 2% target, as can be seen on a 6-month annualised rate for US Core Personal Consumption Expenditures (PCE).

US Core PCE Inflation

With monetary policies now restrictive in most developed countries, real yields available to Fixed Income Investors are not only in positive territory, but also elevated relative to historical levels. Even after the Q4-2023 yield decline, US 10-year real yields remain at levels similar to those prevailing before the 2008 Great Financial Crisis.

US 10-year Real Yield

Beyond developed markets, real yields are also compelling in some Emerging countries.  Indeed, several Emerging Markets’ (EM) central banks have aggressively tightened their monetary policy since 2021, anchoring inflation expectations and allowing for a significant disinflation process, as illustrated below for Mexico, Brazil and Indonesia.

US 10-year Real Yield

Looking at current real yields for the same countries, and even after the Q4-2023 rally, they remain compelling, sitting at or close to, the last 15 years highs.

Mexico, Brazil & Indonesia Real Yield

On top of orthodox monetary policies, most EM local currency markets have been under-owned by foreign investor, making them not only less vulnerable to outflows, but also subject to potential catch-up.

Foreign Ownership of Local Currency Debt %, latest vs 15-year range

Fixed Income investors are now rewarded by positive and sometimes significant real yields, and some EM local currency markets also offer very attractive opportunities for a global and diversified portfolio.

by Gilles Pradère

Senior Fixed Income Portfolio Manager



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