Fixed income – Flight to Quality | Harris Fraser
Research Insights
23 September, 2022
Fixed income – Flight to Quality

Although the global economy continued to slow down, bond market sentiment deteriorated as attention returned to pricing in the possibilities of further tightening in the global monetary policy. Over the month of August, fixed income indices fell across the board, Bloomberg Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds lost 3.95%, 2.93%, 2.30%, and 0.54% respectively.

Our overarching view on the broad fixed income market hasn’t changed. Global inflationary pressures remain high, exerting pressure on global central bank monetary policies. As both the ECB and the US Fed have indicated, monetary tightening will remain in place before inflationary pressures have materially abated, fixed income markets as a whole are expected to experience further pressure from rising rates in the short term. With the central bankers’ strong rejection over potential rate cuts hopes early next year, we maintain our neutral view on duration in fixed income.

Given the deteriorating economic fundamentals we see at the moment, recessionary risks remain elevated in the short to medium term. We maintain our call to lower high yield bond exposure due to their higher correlation to the economic health. Instead, investors should pay more attention to investment grade bonds, especially ones with a high quality balance sheets such as financial institutions, before there are any material changes to the fixed income market landscape. In the short term, inflation indicators and central bank policy rates will dictate the direction of the fixed income market.

 

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