But they were still below the steady-state expected return of 4 per cent, making them "substantially cheaper than they have been in recent years, but...still expensive.
"Germany is slightly more expensive than the US. Yield levels and term premium estimates are still below their steady-state estimates," Robeco concluded.
The yield on the UK gilt has since surged to above 4 per cent for both the 10- and 2-year bonds in response to Liz Truss's economic policies and plans to borrow £72bn more through the bond markets before next April.
Robeco said the market movements in the UK yield curve in September have now changed the UK government bond valuation signal from "expensive" to "neutral".
Corporate bond valuations
When it came to corporate bonds Robeco said at the time of writing corporate bond spreads looked cheap, but they might not have fully priced in future economic conditions.
The global investment grade index’s credit spread was 170 bps at the end of June 2022.
Assuming that about half of the spread will be needed to cover losses due to default in an expected credit cycle, the expected excess return was close to the neutral steady-state level of 0.75 per cent.
Meanwhile, the global high yield index’s credit spread was 620 bps, which, Robeco said, meant it should be able to withstand substantial losses before reaching its neutral steady-state expected return of 1.75 per cent.
"So from a valuation perspective, high yield corporate bonds seem a little cheap, while investment grade credit seems to be fairly valued," Robeco added.
Earlier in September two fund managers explained why they believed high yield bonds could weather the storm of a recession better than many might expect.
carmen.reichman@ft.com
