Inflation was originally expected to ease throughout the year, but the surprise turn of events in Ukraine will likely further fuel the sky high inflation via supply disruptions in Russia. While enacted sanctions have largely excluded the energy sector, there are still more concerns about the supply as OPEC refused to raise production quotas, and the strategic oil reserves coming down further fuelled speculation that energy prices are here to stay. Higher inflation has always been unfriendly to fixed income markets, as central banks have to respond with certain levels of monetary tightening.
That said, central banks are forced to choose between stemming runaway inflation, or to ensure sufficient liquidity in the market. The ECB could slow down on their tightening pace, but the Fed is expected to continue with the plans for tapering and rate hikes. This backdrop remains negative for the fixed income market, even though the bond market could see some short lived rebound as capital flock to fixed income for hedging against geopolitical risk, over the course of the year, we remain negative on this market segment, and consider only the high yield bonds to be an acceptable investment choice.