More than half of US investors see fixed income opportunities from higher interest rates, finds research

A CoreData Research study found that 55% of investors would increase allocations to fixed income if the Federal Reserve was to increase rates to 5%.

Despite growing concerns about the potential damage inflicted by interest rate hikes, US investors are leaning toward fixed income opportunities from higher interest rates, finds new research.

A CoreData Research study of 120 US institutional investors found that more than half (55%) intend to increase allocations to fixed income if the Federal Reserve raises interest rates to 5%.

Under such a scenario, investment grade corporate bonds (36%) and government bonds (33%) are expected to experience the largest increases in allocations.

However, emerging market debt is less favoured, with 23% planning to cut rather than increase (8%) allocations in response to increased interest rates.

The CoreData study, which was conducted last month, also found that half of institutional investors fear higher interest rates will trigger a liquidity crisis – with 49% anticipating hidden fault lines in US financial markets would be exposed by rate rises.

Elsewhere, the survey found than 43% believe the Federal Reserve will not be able to raise rates above 5% due to possible economic damage and financial turmoil.

Some investors were also found to expect equity markets to fall up to 20% this year as a deep recession materialises. Of those surveyed, 27% expect a ‘bear’ case scenario characterised by stagflation, deep recession and a 10-20% fall in equity markets to play out this year.

Only 14% of investors were found to be ‘bulls’, with expectations that 2023 will bring a mild recession followed by a strong recovery, reduced inflation and rising equity markets.

“On the one hand, institutional investors harbour deep concerns about higher interest rates triggering an economic tsunami whose waves will reverberate through the US financial system,” said Andrew Inwood, founder and principal of CoreData,

“But on the other hand, higher interest rates now offer better income opportunities after a prolonged and frustrating search for yield in the post-financial crisis low-rate environment. The income has finally returned to fixed income.”