Horizon Q1│2023 - Bonds

Interest is back

Prof Dr Bernd Meyer and team provide an outlook for the 1st quarter of 2023 in the current Horizon publication.

In a nutshell

  • For safe government bonds, we expect a clear regional differentiation – clear advantages for the US.

  • European corporate bonds: We increase our overweight and build up the subordinated segment.

  • Emerging market bonds: Local currency securities and selected sovereigns in the high-yield segment are our favourites.

European corporate bonds with prospects for a positive year

At 3.6%, European corporate bonds in the investment grade segment are finally offering an adequate yield again, as we last saw at this level in 2012. Even in the event of moderate short-term increases in yields, it should be possible to achieve an absolutely positive development over the course of the year. Despite two and a half years of the COVID-19 pandemic, high energy prices and inflation-related cost pressures, corporate balance sheets appear tidy and robust. Accordingly, there are currently only a few defaults and rating downgrades. Until a few weeks ago, however, we had decided against a pronounced overweight. Both a jerky new start on the new issue markets and a persistently negative trend in capital flows held potential for setbacks. Both factors have brightened noticeably over the past few weeks: new transactions are attracting greater investor interest, and even supposedly riskier companies

Safe government bonds: US clearly in the lead

Past and expected performance of 10-year government bonds, total effect of yield/price change, coupon yield and roll-down effect.

Time period: 15/12/2017–15/12/2022.
Source: Bloomberg, own calculations, iBoxx government bond indices (7-10 years, TR).

Shadow is followed by light

For all segments of the bond market, 2022 proved to be an annus horribilis – stubborn inflation, yield rises, increased volatility and, against the backdrop of the approaching recession, rising risk pre-miums brought investors noticeable losses. Looking forward, however, this development leads to a clearly positive message: interest rates are back and money can be made with bonds again. Where exactly we see the most attractive opportunities, we show below.

Government bonds: Differentiation can pay off

After double-digit losses in safe ten-year government bonds on both sides of the Atlantic in 2022, we expect a regionally heterogeneous development in the coming months. A key reason for this is that inflation is likely to have already peaked in the US, while in Europe the peak is still to come. As a result, monetary policy dynamics will differ between the currency areas. While the Fed is likely to raise its key interest rate to 5.25% already in the first half, only to cut it again in the second half of the year, we expect the ECB to take two steps of 50 basis points each by mid-year without subsequently lowering its main refinancing rate again. For the 10-year government bond segment, this means falling yields again in the US by the end of 2023, but the opposite for German bunds. Together with the higher current interest rate, this results in a clear attractiveness advantage for US government securities. Euro investors should, however, take into account the possible change in the exchange rate or hedging costs in their comparative calculation in this regard – we expect the US dollar to depreciate somewhat in 2023.

Forecasts: base interest rates and government bond yields (in %)

Comparison of Berenberg and consensus forecasts, values at mid-year and end of 2023.

* Average, consensus as of 15/12/2022.
Source: Bloomberg.

Emerging market bonds: local currencies still preferred

The rally in emerging market bonds in the fourth quarter was driven by the hard currency segment in government securities, which had also previously seen the sharpest price declines. Despite this move, as well as a renewed decline in US yields and risk premiums, it was not enough for an absolutely positive performance in 2022. The degree of risk aversion is still elevated and unevenly distributed – both at the country level and between government and corporate bonds in hard currency or government securities in local currency. The latter, which we have favoured in the past, has been able to outperform its hard currency counterpart over the year. For the beginning of the new year, we expect the active positioning in the currency component to become somewhat less important due to already strongly increased local yields. When the key interest rate hike cycles come to an end in many emerging markets and inflation expectations have peaked, the current yield will become even more important in the medium term. In this respect, we are sticking to a successive increase in the duration of local currency bonds. From a market perspective, we are encouraged by the now low investor positioning. We believe most of the capital outflows caused by the market turmoil in 2022 are behind us. Risk premiums are also still at attractive levels despite the recent recovery. An entry into countries in the high-yield segment in particular, with little sensitivity to US yields and only small amounts of debt outstanding over the next one to two years, appears worthwhile. Finally, despite seasonally higher activity in the first quarter, overall issuance should remain manageable, providing additional support for the asset class.

Euro corporate bonds: Capital outflows from funds stopped

Flows in the investment grade (IG) and high yield (HY) segments have stabilised since the summer and the beginning of the fourth quarter respectively.

Time period: 31/12/2021–07/12/2022.
Source: Bloomberg, AuM = Assets under Management, HY = High Yield.

Emerging markets: local currency securities still preferred

Also for 2023, we expect a stronger development for the local currency (LW) segment compared to its hard currency (HW) counterpart.

Time period: 31/12/2021-13/12/2022, indexed to 100 as of 31/12/2021.
Source: Bloomberg, EM = Emerging Markets.

Conclusion: The return of the interest rate creates opportunities

We take a regionally differentiated view of government bonds with high credit ratings and see clear advantages for US over German bunds in the respective local currencies. Corporate bonds have become attractive again at now higher yield levels in both the investment grade and high-yield segments, and we particularly like the financial sector and subordinated issues of first-class borrowers. Finally, in emerging markets, we again prefer the local currency segment and find entry into selected high-yield countries interesting


Martin Mayer
Senior Portfolio Manager Multi Asset
Christian Bettinger
Head of Fixed Income Euro Flexible
Robert Reichle
Head of Fixed Income Global & Emerging Markets