In this month's 'four graphs explaining' series from Professional Pensions' sister title Investment Week, our experts consider fixed income.
Michael Cross
HSBC Asset Management chief investment officer (fixed income)
The difficult near-term growth/inflation trade-off is rightly concerning fixed income investors, and it will be some time before the uncertainties fade. But, taking a step back, medium-term inflation expectations remain anchored, while real rates, and credit spreads, have risen as monetary policy is finally normalising - quantitative easing has ended, and policy rates have lifted off decisively. Central banks now have more room for manoeuvre, if they need it, which markets should welcome. Looking ahead, the prospect of bonds with positive real yields whose prices primarily reflect the fundamentals of credit research is a ray of light in the current fog.
Michael Matthews
Henley fixed interest team co-head
Investment grade corporate bonds were perhaps the least favoured asset class coming into 2022, with tight spreads and low yields. The repricing of interest rate expectations has unsurprisingly had a large impact on bond markets. Swaps markets currently forecast the bank rate will reach around 3% over the next year. Sterling investment grade yields have increased from 1.6% to 4.4%. Credit spreads have widened because of the challenging economic backdrop and increased recession risk. However, according to recent data from Deutsche Bank, current spreads are sufficiently high to compensate for historic peak default rates. Subsequently, the Sterling IG market now looks more attractive than it has for many years and, at current levels, potentially offers a good entry point.
Harry Children
Albemarle Street Partners investment analyst
Breakevens - the difference between the return on a vanilla bond and the return generated on a similar inflation-linked bond - have started to decline, suggesting a slowdown in inflation trends. Central banks have generally adjusted global monetary policy to stay ahead of the curve. The Fed's latest announcement of raising interest rates by 75 basis points is proof of this and has cemented their credibility. The fixed income market is therefore indicating that inflation, its biggest risk, is an issue that is now in the rear-view mirror. The recent repricing of bonds has meant that the asset class has become particularly attractive for multi-asset managers. This may provide portfolios with diversified return opportunities, away from equities, as we enter a period of economic uncertainty.
Baylee Wakefield
Aviva Investors portfolio manager (multi-asset)
The rapid rise in inflation has led to a sharp repricing in fixed income. While energy and commodity prices have taken the headlines for driving inflation higher, core inflation is also well above 20-year averages. This year we have seen the death of 'transitory', with central banks previously not appreciating that inflation would transfer from Covid-19 reopening to become much more broad based. We have seen duration, credit spreads and equities selling off instantaneously as investors priced in higher interest rates at the expense of future growth. The inflation fight is not over yet and will remain crucial for investors.
