According to DBS, the “higher for longer” interest rate environment by the US Federal Reserve (Fed) will ensue until recessionary signals emerge. On separate occasions on Oct 8 and 9, various top Fed officials reportedly said the tightening may pause. For example, Dallas Fed President Lorie Logan said that if risk premiums in the bond market are on the rise, that “could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening”.
The “sweet spot” from a risk-reward perspective is to invest in shorter-dated investment grade bonds, says Hou Wey Fook, the chief investment officer of DBS. That means buying bonds from safer, higher-rated issuers with shorter maturities while waiting for market volatility to blow over.
Hou was speaking at the bank’s 4Q2023 investment outlook briefing on Oct 4, titled The Next Yield Play, which details their investment strategy for this quarter. Corporates have been taking advantage of zero bound rates from 2020 to 2022, but with interest rates and yields “exploding”, the investment grade sector is “much better insulated”, in which there will be a continuation of a low default rate environment, he adds.
