Investment Grade

Growth in 2022 is likely to be above historical averages for most developed economies, even after adjusting forecasts for the impact of the Russian invasion.

Soaring inflation was already a dominant theme for markets coming into 2022. The sanctions imposed on Russia in response to its invasion of Ukraine have only exacerbated its expected rise, and pushed its expected peak further out.

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.  

Last week investors were faced with a double whammy of monetary tightening from the Bank of England (BoE), which on Thursday hiked interest rates by 25bp and announced the gradual unwind of its £20bn corporate bond portfolio.

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.

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.

It will take time for this sector to recover and we are likely to see more suppliers collapse in the coming weeks and months.

Our base case is for a continuation of quite high growth and a modest inflation overshoot. For bond investors, positioning for stagflation could be a dangerous trade if that base case bears out

This supply surge can be very welcome for those investors with cash to put to work, though it is also eyed with caution.

Frustratingly for fixed income investors looking to buy bonds, the data seem to fully justify the high valuations we see in so many parts of our market at the moment; it really would not make sense to be able to buy bonds cheaply when conditions are so good.

As we are nearing the end of 2020 and assessing pockets of potential value going into 2021, we have to question the strong rally we have just experienced and assess the attractiveness of the hybrid spread multiple and whether or not we can expect further compression.