Opportunities and trends in the fixed income market – Interview with Rocco Bove from Kairos
18 FEB, 2025
The financial landscape of 2025 is shaping up as a scenario of continuity and evolution, where the fundamental factors driving the markets will remain at the center of the scene. Despite the change of year, economic foundations and political decisions will continue to be the main axes that will determine the course of investments. The new administration in the United States positions itself as a key player, whose policies will have a significant impact on the financial sphere worldwide.
In this context, fixed income emerges as a particularly attractive option for investors. High initial yields, combined with general economic trends, position this type of asset not only as a potential source of stable income, but also as an opportunity for capital appreciation. In addition, fixed income presents itself as a diversifying element of portfolios, in the face of the volatility of other market assets.
In this interview, Rocco Bove, director of fixed income at Kairos Partners, shows us what the investment opportunities and trends are in the fixed income market.
How does the current interest rate scenario affect your fixed income investment strategy?
The evolution of interest rates is a key factor in our fixed income investment strategy. We continue in an environment of global relaxation by the main central banks, and in Europe we believe that the ECB has room for further rate cuts. This scenario favors positive returns both in absolute terms and through yield curve movements, with the possibility of a greater inclination. In addition, the current environment favors credit, which benefits from the carry and the drops in the curve.
Given the global economic environment, which segments of the fixed income market do you find most interesting at the moment?
The European financial sector seems particularly attractive to us, as it is well positioned thanks to solid balance sheets, high levels of capital -often in excess- and better credit quality. European banks also benefit from high profitability and solid interest margins. In addition to subordinated financial values, we see opportunities in European credit, especially in corporate hybrids and in the high yield segment, which offer an attractive additional return over risk-free.
How do you assess credit risk in the current environment and which sectors or issuers do you prefer?
The current economic environment is characterized by a resilient economic cycle and the continuous support of central banks, which creates a favorable environment for credit. However, as we are in a late phase of the cycle, it is crucial to adopt a very selective approach. We lean towards the financial sector and we look favorably at the real estate sector, as it benefits from lower rates. We also observe with interest the manufacturing sector, while we are more cautious with the consumer and automotive sectors.
What role do green and sustainable bonds play in your portfolio?
Green bonds and sustainable bonds represent a significant advance in the bond market in recent years, in line with the growing attention paid to ESG criteria. These instruments play an important role in our portfolio, but selection remains essential: in addition to the sustainable aspect, we carefully evaluate the solvency of issuers and issues. The "green" element is an added value, but it does not replace fundamental credit analysis.
With the current market volatility, how do you manage duration and interest rate risk?
We adopt a dynamic and flexible approach to duration management. Currently, we have increased the duration to about four years, taking into account the rate environment, but we actively manage it through portfolio adjustments and derivative instruments such as futures and options on rates. This allows us to quickly adapt to market movements and effectively manage interest rate risk.
What opportunities do you find in emerging market fixed income?
Emerging markets could be one of the surprises of 2025. Although they are affected by critical factors such as global trade, the strength of the dollar and geopolitical tensions, we believe they could offer interesting opportunities throughout the year. Our approach remains cautious and selective, focusing on the solvency of sovereign and corporate issuers, to identify the best opportunities in a complex environment.
What trends would you highlight in the fixed income market?
The fixed income market is experiencing an evolution driven by automation and the growth of passive funds. In this scenario, however, there are significant opportunities for active and flexible managers, who can exploit the numerous inefficiencies of the market.
