Start 2023: still focusing on bonds and active management

Christine Lagarde, President of the European Central Bank (Bce), did not mince her words: "Interest rates will still have to rise significantly at a steady pace", Lagarde said, recalling that in six months the Bce has already raised the cost of money by as much as 250 basis points (2.5 per cent), i.e. at a pace not seen since the Frankfurt monetary authority was founded. 

The European Central Bank's intention is therefore to maintain a restrictive monetary policy for a while longer, in order to bring inflation in the Old Continent back to its targets. This is why savers in Italy and throughout Europe still have to move in a complex scenario, where it is not easy to implement winning investment strategies.

There is no doubt that fixed income securities (i.e. corporate and government bonds) have regained a lot of appeal after a forgettable 2022. Last year, precisely because of rising interest rates, bond prices plummeted, driving up the potential returns for those who buy them today. In the case of Italian multi-year Treasury bonds (Btp), 10-year bonds currently yield more than 3.5 per cent per annum, more than two percentage points higher than at auctions a year ago. With these numbers, it is fair to say that government bonds and other bonds can give the portfolio a bit of a boost, as they offer higher interest than before and can balance the ups and downs of equities within a balanced asset allocation.

"There is no shortage of opportunities in corporate bonds either, just think that, at the beginning of 2022, 80% of European corporate bonds were yielding less than 1%", says Paolo Baldessari, Head of Fixed Income & Alternative Investments at Banca Generali, who adds: "Today the average yield on quality corporate bonds is around 4%, a level not seen since 2011, when the crisis of the peripheral countries exploded and the Eurozone seemed on the brink of disintegration."

Baldessari emphasises that, within Banca Generali's Asset Management, this 'historic' opportunity was seized, returning to investing in government and corporate bonds, especially by subscribing to the new issues being placed. "The volumes of new bonds brought to the market have been record-breaking in these first weeks of 2023, approaching 100 billion euros," adds Banca Generali's Head of Fixed Income & Alternative Investments.

"Asset Management," continues Baldessari, "participated in over 10 'primaries', with a very selective approach: our preference is still for bonds placed by companies with very solid fundamentals, high coupons, prices close to par and maturities that are not particularly long, given the current negative slope of the rate curves."

In this scenario, however, there is one element that should not be overlooked. If it is true that the race to raise interest rates is not over, as President Lagarde herself said, then we must expect (or not rule out) other phases of volatility for bond prices, as is usually the case when the central bank's monetary policy is still restrictive. Furthermore, another variable that savers have been dealing with for more than a year should not be underestimated.

We are talking about inflation, which relentlessly erodes the purchasing power of savings. In 2022, price increases in Italy averaged over 8%, with peaks of over 11% in the final months of the year. For 2023, on the other hand, the trend is downward and a price increase of around 5-6% is expected. This is a much lower level than before, but still far from negligible and undoubtedly still higher than average bond yields, which are therefore currently unable to fully compensate for the erosive effects of high prices. In this complex scenario, it clearly emerges that it is advisable to rely on the experience of an active manager and a good financial advisor, who can implement the right portfolio strategies.