For most of 2022 and into 2023, the conversation about bonds was dominated by a single theme: the great bond bear market. Rising rates meant falling prices. Duration was the enemy. Fixed income allocations that had provided stability for decades were suddenly a source of significant losses.

The narrative has since shifted. Rates have peaked, or so the consensus believes, and bonds are back in favour. Inflows into fixed income funds have recovered. Yield levels that had not been seen in over a decade are attracting capital back into the asset class.

The enthusiasm is understandable. But the investors who will generate real alpha from fixed income in this environment are not simply those who bought the asset class when yields were high. They are those who understand where within fixed income the genuine opportunity sits and where the risks remain underappreciated.

The public market opportunity

In public bond markets, the environment has become genuinely more interesting. After a decade of financial repression in which yields offered little compensation for risk, the reset of 2022 created starting yields that are defensible for long term investors. Investment grade corporate bonds, select sovereign debt and certain segments of the high yield market now offer income levels that justify consideration.

But tight credit spreads remain a concern across much of the investment grade universe. The income is better than it was but in many cases, the risk premium does not fully compensate for the credit risk being taken. Active selection matters enormously. Passive fixed income exposure in this environment is a blunt instrument.

The private market arbitrage

The more compelling opportunity in fixed income sits at the intersection of public and private markets. There is a persistent and meaningful yield differential between comparable credits in public and private bond markets, a differential that exists for structural reasons and that sophisticated investors can systematically exploit.

Private bond structures offer yield premiums that reflect genuine scarcity of capital, complexity premium and illiquidity compensation. For investors with the capability to analyse, underwrite and hold private fixed income instruments, that premium represents genuine additional return and not additional risk taken for its own sake.

At Terralumin, we move actively between public and private bond markets depending on where the relative value is greatest. When public markets offer compelling entry points, we participate. When private structures offer superior risk adjusted returns, we allocate there. The mandate to move between the two is a structural advantage that most fixed income managers do not have.

Active trading versus holding to maturity

Not all bonds in our portfolio are held to maturity. Some positions are actively traded, where we see mispricing, where macro events create temporary dislocations, or where the technical structure of a market creates short term opportunities that do not require a long holding period to realise.

This combination of active trading and hold to maturity positioning gives us flexibility across the full fixed income spectrum. We are not forced sellers in volatile markets. We are not passive holders waiting for coupon payments. We are active managers using the full toolkit available to us.

The bottom line

Bonds are back but the investors who will benefit most are not those who simply bought duration when yields were high. They are those who understand the difference between public and private fixed income, who can identify mispricing across the credit spectrum and who have the mandate to trade actively when opportunity presents itself.

Fixed income at Terralumin is not a defensive allocation. It is an active, conviction driven source of alpha and in the current environment, the opportunity set is the most interesting it has been in over a decade.