With higher inflation, global markets are looking at faster monetary tightening, only high yields have managed to end the year on a positive note. In December, the Bloomberg Barclays Global Aggregate and US Investment Grades were down 0.14% and 0.08% respectively, whereas US High Yields, and Emerging Markets US Dollar Bonds were 1.87% and 0.98% higher.
Inflation in major economies remain severe, both the US and Europe figures are close to record highs. The US Fed sped up its tapering schedule in response, where the tapering of bond purchases will now be complete by March, the end of bond purchases opens up the opportunity for rate hikes. At the time of writing, rate futures markets expect 3 rate hikes from the Fed in 2022; meanwhile, treasury yields are also climbing higher, these would be problematic for the fixed income market if they do materialise.
Henceforth, ‘HY over IG’ will remain our core view on the fixed income market into 2022. We still expect the longer duration IG bonds to suffer more as global interest rates move higher over the year. In contrast, we still see opportunities in the high yield space. Global high yields should see further improvement with the continued pandemic exit, while remaining relatively unaffected by the rising rates due to their lower duration. Asian high yields in particular could offer a rare opportunity, as the anticipated loosening monetary environment in the Chinese market could potentially start the recovery in this badly hit market in 2022.