Fixed income portfolios could see better returns next year as investors seek protection from economic recession and volatility in other assets, bond fund managers said.

Bonds can begin to “normalise a bit” after adjusting to the end of quantitative easing and negative rates this year, Jim Cielinski, global head of fixed income at Janus Henderson Investors, told the Reuters Global Markets Forum (GMF) on Friday.

“Bond prices are likely to … head higher into a more friendly expectation for the Federal Reserve,” he said.

Bonds prices have been hit by rising interest rates and uncertainty over central bank policy this year.

“U.S. fixed income looks attractive at the moment,” said Jonathan Mondillo, abrdn’s head of North American fixed income.

Mondillo said bond markets will remain volatile in 2023, but expected positive total returns, specifically in corporate and municipal debt, both of which look attractively priced relative to equity markets.

The ICE BofA U.S. Treasury Index .MERG0Q0 is on pace for its biggest annual drop on record, while the benchmark 10-year U.S. Treasury yield US10YT=RR is trading around its highest levels since 2008.

“The worst is probably behind us,” Mondillo said.

Both managers see an economic slowdown next year, with Cielinski pointing to “credit growth, real incomes and high inventories” as signs of trouble ahead.

Cielinski recommended mortgage and other asset-backed securities, along with more permanent allocations to cash and cash instruments.

“Asset classes, overly buffeted by liquidity, but that have better protection to a slow economy look attractive,” he said.

As the most volatile period in years for traders draws to a close, the year-end dash for cash and high-quality assets will likely prove more challenging than usual in markets.
Source: Reuters (Reporting by Lisa Pauline Mattackal and Anisha Sircar in Bengaluru; Editing by Divya Chowdhury and Kirsten Donovan)