With the numerous global central banks expecting that inflation would be here to stay, monetary tightening is a foregone consensus, markets continue to price in the impacts of expected rate hikes. Over the month of November, Bloomberg Barclays Global Aggregate, US High Yields, and Emerging Markets US Dollar Bonds were down 0.29%, 0.97%, and 1.07% respectively, while US Investment Grades still managed to edge 0.06% higher.
The latest inflation data in both the US and Europe remained far above the long term target, supply chain disruptions could be here to stay for an extended period. Henceforth, driving the need for global central bank action, further tightening is expected. At the time of writing, interest rate futures showed that markets are now pricing in 2-3 rate hikes for the Fed in 2022, other central banks apart from the ECB and the BoJ are also expected to walk on the same path, so as to stem the rapidly surging inflation.
This makes for a difficult case for investing in fixed income. With future rate hikes expected, the current downside risk in form of interest rate risk increases. If one does need to invest in the fixed income market, we continue to hold our ‘high yield over investment grade’ view, but investors would need to pay attention to 2 things. Duration should be minimised, so as to reduce interest rate risk. Equally important is the credit quality, as tighter liquidity conditions, dialled down fiscal stimuli, and a slowing economy all pose as a risk to weaker companies.