Bond valuations are compelling

This month’s Chart of the Month shows how core government bonds are looking much more attractive at current valuation levels. Real yields have returned to levels last seen before the global financial crisis, having unwound all the effects of financial repression caused by quantitative easing and zero interest rates.

We believe that these valuation levels represent a compelling case for holding core bonds, particularly given the current tariff uncertainty and the more challenging macro outlook. As a result, we are adding duration to our fixed income portfolios. We are also increasingly seeing clients add duration, as they look to reallocate away from credit.

All eyes are now on the Federal Reserve (the Fed). While the US central bank has remained on hold in April, leading indicators have weakened significantly in recent weeks. Initial analysis of April’s data suggests that the impact of tariffs will feed through to inflation and economic activity with a lag. Once the data turns, we would expect the Fed to ease rates into accommodative territory, which would be supportive for duration.

With real yields now close to long-run averages, we believe core bonds have the capacity to rally, allowing them to act as a risk hedge in portfolios should growth sentiment begin to decline. We also continue to see regional divergence in performance across global bond markets, with US and UK sovereign valuations looking more attractive relative to Europe at current levels.