Fallout from the Ukrainian conflict would likely linger, fuelling global inflation. With the global monetary policy outlook unchanged, fixed income markets continued to face difficulties as yields rise and bond prices fall. In the month of March, the Bloomberg Barclays Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bond Indices were down 3.05%, 2.52%, 1.15%, and 2.34% respectively.
With the CPI figures in the US and Europe shooting to new highs in decades, we don’t see a change in the inflation trajectory. The current situation is expected to stay, as sanctions on Russian exports had hit the global supply, disruption in Ukraine and nearby regions affects several agricultural commodity exports. Food and energy prices are expected to remain elevated as these supply constraints will likely stay for the time being. Henceforth, so as to tackle the problem, global central banks will certainly continue to move on their original tightening path.
At the time of writing, Bloomberg interest rate futures indicate that markets expect at least 200 bps in rate hikes from the US Fed and 50 bps from the ECB. With rates climbing, staying short on duration would limit the downside in the portfolio. We also note that the global economy is slowing down due to elevated inflation and uncertainties, the potential stagflation or even recession casts a shadow over high yield bonds. With the tightening expectations further escalating, the fixed income outlook stays pessimistic, and we would currently recommend underweighting fixed income across the spectrum in the short term.