Sara
Silano:
“Say
yes
to
bonds”
was
one
of
the
key
calls
in
the
Morningstar
Investment
Management’s
outlook
for
this
year.
But
are
bonds
good
for
income
investors?
Nicolo
Bragazza,
Associate
Portfolio
Manager
at
Morningstar
Investment
Management,
joined
us
to
share
his
insights.
Nicolo,
welcome
and
thank
you
for
accepting
our
invite.
Nicolo
Bragazza:
Thank
you
for
having
me.
So,
after
the
significant
rise
in
yields
over
the
last
couple
of
years,
bonds
are
now
offering
more
attractive
yields
and
therefore
they
can
now
play
again
multiple
roles
in
investor
portfolios
from
diversification
to
yields.
Bonds
represent
the
bulk
of
the
portfolio
of
any
income
investor,
as
income
is
contractually
predetermined
and
paid
at
predetermined
days.
And
if
those
bonds
are
government
bonds,
the
likelihood
of
being
paid
back
is
higher.
However,
as
a
general
rule,
investors
need
to
remember
that
the
higher
the
yield
and
the
income,
the
higher
the
risk.
And
it’s
very
important
to
pay
attention
to
valuation,
especially
in
periods
where
credit
spreads
are
particularly
tight.
Silano:
What
will
happen
to
investors
in
treasury
bonds
if
the
ECB
cuts
interest
rates
in
June?
Bragazza:
As
a
general
rule,
lower
yields
imply
higher
bond
prices.
And
this
is
because
future
cash
flows
are
discounted
at
the
lower
yield
and
therefore
their
value
goes
up.
However,
the
extent
to
which
a
cut
will
move
bond
prices
does
not
depend
only
on
the
size
of
the
rate
cut
but
also
by
how
much
that
rate
cut
is
already
priced
in
by
the
market.
As
of
today,
it
seems
that
the
market
is
already
pricing
a
rate
cut
and
therefore
the
move
is
likely
to
be
less
pronounced
than
if
you
were
to
get
a
completely
unexpected
cut.
That
said,
this
cut
is
not
certain
and
therefore
you
can
expect
to
have
some
positive
impact
on
bonds
if
the
central
bank
goes
ahead
with
the
rate
cut.
Silano:
What
are
the
best
options
for
income
investors
in
the
fixed
income
space?
Bragazza:
So,
the
first
thing
that
an
income
investor
should
determine
is
its
willingness
and
ability
to
bear
risk.
A
low-risk
income
investor
can
think
of
a
portfolio
of
government
bonds
as
a
good
option
to
get
some
predetermined
income
with
low
risk
of
not
being
paid
back.
However,
if
an
investor
has
more
tolerance
for
risk,
an
income
portfolio
should
also
include
some
corporate
bonds
and
high
yield
bonds
as
structural
components
because
they
allow
to
generate
extra
yield.
A
more
sophisticated
income
investor
instead
with
tolerance
for
risk
can
also
consider
the
addition
of
EM
bonds
to
their
portfolios,
both
in
US
dollars
and
in
local
currency,
taking
into
account
the
extra
risk
coming
from
currency
when
we
talk
about
local
currency
bonds.
Silano:
Nicolo,
thank
you
very
much
for
coming
here
today.
For
Morningstar,
I’m
Sara
Silano.
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