Buying the dip still a good strategy for today's fixed income market

SUMMER can be tough for investors, if negative macro shocks coincide with the summer lull in liquidity, leading to amplified price actions and cancelled holidays. Fortunately, this August proved to be more benign, with a continuation of the positive trends seen over the past few months: macro data continued to come in generally better than expected, central banks stood ready to accommodate and fiscal policy remained expansionary.

Equities, globally, continued to perform well. While a rise in government bond yields meant that most fixed income products delivered negative or only marginally positive returns, the sell-off seemed nothing more ominous than yields returning to the middle of the tight trading range they have been in since March. Credit spreads have tightened, but at a slower pace than before, which is not surprising - given the amount of spread compression that has already taken place.

With not much having changed, we remain positioned to potentially benefit from riskier fixed income assets outperforming, and low-risk government bonds trending sideways. However, increasingly demanding valuations suggest that future return expectations have moderated, and so we continue to marginally reduce risk. Most credit spreads have reversed nearly all of their widening from earlier this year and are close to their long-term averages.