- Fixed Income Portfolio Manager
- Funds
- Capabilities
- Insights
- Sustainability
- About Us
- My Account
The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
There is a lot happening in the global economy right now, but if we were to choose one piece of data that is likely to inform our thinking about credit markets over the next six to 12 months, it would be the reduction we’re witnessing in the global central bank balance sheet (Figure 1).
There was, of course, a huge spike in central bank asset purchases in 2020, in response to the pandemic. But more broadly, we have seen nearly $20 trillion of central bank purchases since the global financial crisis (GFC) in 2008. From a market perspective, we’ve been quite spoiled. Even when central banks made a concerted effort to take back some stimulus in 2018 – 2019, they pivoted away from that path fairly quickly when markets started to crack.
What's changed today and left central banks willing to begin withdrawing liquidity? There is now a clear trade-off between growth and inflation that didn’t exist prior to this year. Inflation has reached levels we haven’t seen since the 1980s, creating a cost that central banks cannot ignore.
Our research suggests this change is structural, and that we should expect more cycles and much greater volatility in economic growth and inflation. In our view, central banks are no longer a suppresser of volatility, as they generally have been since the GFC. Instead, they are more likely to amplify volatility going forward.
There has been a clear link between global quantitative easing and the direction of risk assets, including equities and credit spreads. This will likely present a challenge for investors for the rest of this year and into 2023. We think central banks are behind the curve and have a long way to go in reducing their balance sheet. In fact, they still completed $100 million in asset purchases in the first few months of this year (following $3.5 trillion in purchases in 2021 and $6 trillion in 2020). But by the second half of 2022, central banks will have fully transitioned to being sellers of bonds.
We expect this environment to generate new opportunities. Historically, when central banks are in full tightening mode, that’s when the tide goes out and it becomes possible to see which assets were mispriced, which business models didn’t really work, and who made the wrong call by putting leverage on certain business models. This should result in heightened dispersion in the market, and in fact, we’re already seeing signs of this, as shown in Figure 2.
As credit market investors, we believe this will be a promising backdrop for exploiting inefficiencies through security selection. We think it will require a combination of top-down credit market analysis and bottom-up research on sectors and individual issuers.
For more on the macro factors driving fixed income and other markets, see our Mid-2022 Investment Outlook.
Securitized assets: Caught in the storm but with scattered bright spots
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Time for a new playbook on bonds
Is it time to add to fixed income allocations? Multi-Asset Strategist Adam Berger and Fixed Income Strategist Amar Reganti offer their views, as well as thoughts on specific areas of opportunity.
4 reasons why European investors may benefit from going global
Bonds are looking increasingly attractive, but a new, more volatile, normal means investors with a home bias may wish to revisit portfolios. An inconsistent policy landscape and lower hedging costs are just some of the reasons why European investors in particular may benefit from going global.
Commercial real estate: Seeking shelter from the storm
Finding potential opportunities in commercial mortgage-backed securities these days is all about knowing where to look, says Fixed Income Credit Analyst Carolyn Natale.
High-yield bonds: Too early to get aggressive?
Our high-yield team suggests a somewhat defensive risk posture for now but expects opportunities to take on greater risk to arise later this year.
Will higher rates sap US consumer spending?
Higher interest rates have increased borrowing costs. Could a consumer-led US recession be looming? Fixed Income Portfolio Manager Kyra Fecteau sees three factors that may help mitigate the impact.
Securitized assets: Caught in the storm but with scattered bright spots
Securitized assets have been on the front lines of the ongoing turmoil in the banking sector, but not all securitized subsectors appear equally vulnerable.
Deep and diverse: Welcome to today’s Asia credit market
Two of our Singapore-based experts on Asia credit discuss the market's key features, along with how it's evolved and is likely to continue doing so.
Fixed income 2023: Ripe for a reversal
Three of our fixed income investment professionals discuss the potentially compelling opportunity set to be found in today's global bond markets.
Sector rotation opportunities for nimble credit investors
Following a credit market rally, Fixed Income Portfolio Manager Rob Burn still sees value in higher-yielding sectors but believes investors should stay nimble.
What’s driving convertibles in 2023?
Following a challenging 2022, Fixed Income Portfolio Manager Mike Barry and Investment Director Raina Dunkelberger highlight three tailwinds that may help turn the tide for convertibles.
Spread the risk: Our top three fixed income diversifiers for 2023
Fixed Income Strategist Amar Reganti highlights three types of strategies that may be well positioned to provide fixed income portfolio diversification going forward.
URL References
Related Insights