Fixed income markets had divergent performance over the month, riskier assets continued to benefit from the continued improving economic environment, while concerns over possible tightening in liquidity put more pressure on higher grade bonds. Bloomberg Barclays Global Aggregate and US Investment Grades lost 0.42% and 0.30%, while US High Yields and Emerging Markets US Dollar Bonds rose 0.51% and 0.97% respectively.
Inflation conditions remain elevated, CPI figures in the US stayed above 5%, which is significantly higher than Fed’s target level. The situation in Europe is similar, where inflation measurements reached a near 10 year high. Concerned over possibilities that the situation could impact the future monetary policy, market participants trimmed their positions to reduce duration exposure. However, during the Jackson Hole Symposium in late August, Fed Chairman Jerome Powell has been surprisingly dovish in his speech.
According to Powell, the Fed acknowledged that the current inflation has reached the Fed’s target, but they are still not planning to make any tapering calls within the short term. However, with the bond spreads close to the historic low, we would still avoid holding too much exposure in fixed income assets. If one has to invest in the fixed income spectrum, we would continue to value high yields over investment grades, as the largest source of risk in form of duration tends to be lower in high yields. However, when investing in high yields, bear in mind that the credit quality remain of upmost importance, as the recent defaults and credit warnings in China have shown.