Increased geopolitical tensions and heightened macroeconomic uncertainty will always lead to reassessed investment assumptions and market volatility. Looking at the current situation, tariffs will likely hurt the consumer through price inflation and hamper GDP growth. Government bond yields and credit spreads have consequently been on the move.
What's the noise?
There is downside risk for the US economy as Donald Trump's administration embarks on a series of polarising and potentially harmful tariffs. There has been a notable shift in rhetoric from the US – in relation to its support for Ukraine and general alignment with Europe – which has set off alarm bells on the continent, resulting in potentially historic shifts in fiscal policy from Germany and other countries, in turn moving their government bond yields considerably higher. Amidst this volatility, credit markets have behaved relatively calmly; whilst spreads have recently widened, this has been modest in absolute terms and the all-in yield of credit has led to renewed strong demand for the asset class.
It's important to remember that performance comes from long term investing and not being dragged by day-to-day market movements.
Can spreads tighten from here?
While sterling investment grade all-in yields are attractive, their make-up has changed; even including the most recent spread widening, spreads have tightened significantly over recent years and government bond yields have not fallen as many expected they would. The result has been that a larger component of the all-in credit yield is from government bond yields. And the recent volatility we have seen in fixed income markets has been driven by underlying government bond yields responding to geopolitics and macroeconomic uncertainties.
For professional investors only. This material is not suitable for a retail audience. Capital at risk. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice. Forward looking statements are subject to certain risks and uncertainties. Actual outcomes may be materially different from those expressed or implied.
