Fixed income indices resumed the slide in June, as the market remain under the two pronged pressure of rising rates, as well as reducing liquidity, bond yields continue to go higher, and the trajectory is expected to stay unchanged in the short term.
Over the month of June, Bloomberg Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds Indices fell 0.88%, 2.80%, 6.73%, and 4.57% respectively.
We see no change in the global macro outlook, as the overarching problem of high inflation remain in place. Not only did energy costs surge, other items ranging from services to food also rose as a knock-on effect. Due to width of the issue, it would take longer before the supply and demand balance could be restored. In response, the ongoing monetary tightening could stay around for longer. Markets expect rates to continue its rise, putting more pressure onto the bond market. Bonds with longer duration, especially investment grades, are expected to take further hits to their performance.
Other than the interest rate risks, we are also concerned about the economic outlook. With high inflation and a slowdown in the global economy, recession probability has risen to considerable levels. As credit spreads tend to widen significantly during economic downturns, we also encourage investors to stay light on credit exposure. Given no change in the external risk factors, we maintain our underweight suggestion on fixed income. If one really needs to invest in bonds, the only option is to get short duration high quality bonds.