Fixed income markets stayed positive over the month, as near term concerns over tapering dissipated temporarily. Bloomberg Barclays Global Aggregate, US Investment Grades, US High Yields, and Emerging Markets US Dollar Bonds rose 1.33%, 1.37%, 0.38%, and 0.16% respectively.
While the US CPI and PCE figures continue to stay elevated, the GDP growth figure falling short of market expectations, and the resurgence in COVID cases due to the delta variant, led to market speculation that the current inflation is actually transitory, as a slowdown in the economy would likely alleviate inflationary pressure from the wage and demand side. This echoes with the Fed claims that the inflation will not be sustained, and sent bond yields lower and bond prices higher.
Despite the recent positive sentiment, our view have not changed on the mid-term, as market is still expecting rate hikes in the coming few years down the road. As the latest Fed Dot Plot showed that sentiment among Fed members is shifting towards the hawkish side, the 2022 Dec Fed fund futures shows a 36% chance of a rate hike, we expect announcements on the Fed tapering timeline before the end of the year. Henceforth, duration exposure, as repeated many times in the past, should be minimised to reduce the impact on the portfolio. Thus, we remain more positive on high yields over investment grades with their shorter duration and better carry.