As we referenced in Q1, the 2022 bear market hoisted yields to levels not seen in more than a decade, positioning fixed income markets—particularly the higher yielding sectors—for an extended period of solid returns. That backdrop remains in Q2 as do the uncertainties that will rattle markets over the near term. 

Bottom line: Bonds are positioned for solid returns, and they should outperform cash and equities if serious downside risks materialize.

Divergent markets can create value for those moving across regions, sectors, and issuers. In Q1, “American Exceptionalism” paused, boosting U.S. bond returns. Simultaneously, European credit outperformed on an excess return basis amidst expectations for accelerating European growth. 

Ongoing policy confusion seems destined to continue to prompt bouts of market turbulence that precipitates relative value opportunities.

The post-COVID bond market has been prone to dramatic overreactions and course corrections as participants struggle to understand the post-pandemic paradigm. The lesson for investors is clear: don’t confuse extreme market movements with changes in fundamental market trends. Rely on research and analysis to distinguish the market spasms from true changes in value and capitalize on reversions back to fundamentals.