Global High Yield Bonds

European bank equity has been among the hardest hit sectors since Russia’s invasion of Ukraine, as fears of losses and a flight to quality have prompted investors to change positioning.

Escalating geopolitical tensions have contributed to a volatile past week for investors, but uncertainty regarding central bank action continues to dominate the bond markets, with one investment bank now predicting nine straight hikes from the Fed beginning at its March meeting.  

So far this year, the spread between two-year and 10-year US Treasury yields has declined from 77bp to 51bp.

As 2021 wore on we became increasingly concerned that the disconnect between asset prices, economic fundamentals and monetary policy was becoming more acute.

After a challenging January, which saw markets beginning to come to terms with a very hawkish Fed pivot and rising Russia-Ukraine tensions, it is worth taking stock of the moves we have seen in fixed income over the last few weeks.

Powell’s hard line may have surprised investors, particularly in light of recent market volatility and increasing geopolitical risk in Eastern Europe, but the Fed’s fear of prolonged higher inflation looks to be trumping those concerns.

Emerging markets assets have endured a lot of punishment during 2021.

Fundamentally the outlook for 2022 appears less supportive than it was 12 months ago.

What we are currently experiencing is a disconnect between monetary policy, the economy and the markets, a disconnect that in our view will struggle to survive much longer.

With rising government bond yield curves one of the biggest concerns for fixed income fund managers going into 2022, Eoin Walsh points to interest rate swaps as one option for reducing the rates risk of a portfolio without impacting its credit exposure.

With forecasts remaining low and credit fundamentals as supportive as they are, the outlook for US high yield continues to look compelling.

Fixed income markets have experienced a reasonable correction over recent weeks and, for higher-yielding indices at least, their first negative period so far this year.