In the last month of the volatile year, fixed income markets had mixed performance across the board, monetary tightening concerns exerted pressure on bond prices. Over the month of December, the Bloomberg Global Aggregate and Emerging Markets US Dollar Bonds gained 0.54% and 0.85%, while US Investment Grades and US High Yields lost 0.44% and 0.62% respectively.
2022 has been a difficult and volatile year for fixed income, as the major themes of inflation and monetary tightening dominated markets throughout the year. As the year comes to an end, inflation figures across major economies has seemingly peaked, but it is still expected to stay elevated, and rates cuts are not expected to take place before inflation figures return to normal levels, until there is adequate demand destruction, short term upside is likely limited.
As global monetary policy would remain tight, the recession risks remain in place. Our outlook on the fixed income market remains largely unchanged from the previous month: underweight credit spread, while slightly overweighting in duration. Credit quality would likely be important under this macro backdrop, high yields are poised to suffer further as the economic conditions further worsen. On the contrary, investment grades could benefit from risk aversion. Furthermore, the US rates are around 50-75 bps away from the indicated terminal rates, long end yields have likely peaked, further downside due to interest rate risks are limited. Henceforth, overweighting in investment grade, both short and long term bonds, will be our preferred strategy in the near term.