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The views expressed are those of the author 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.
Today’s fixed income allocators face a variety of challenges: still-low interest rates, tight credit spreads, increased market fragility, and ever-present liquidity concerns. Growing investor liabilities and spending needs demand reliable fixed income diversification and a more consistent portfolio return profile.
We believe an outcome-oriented, ”all-weather” credit (AWC) approach that encompasses public, private, and perhaps alternative credit investments may help allocators meet these challenges and navigate a wide range of economic and market environments, including unexpected cycles and bouts of volatility. In our view, such an approach to credit investing can enable investors to potentially earn attractive total returns during periods of tight spreads, while remaining positioned to take advantage of market dislocations, exogenous shocks, and shifts in the credit cycle — in short, a durable credit portfolio that is robust and resilient enough to “weather” the inevitable ups and downs of credit investing.
As we enter the stretch run of 2021, there are two key takeaways from our latest bond market outlook. We believe fixed income investors should think about: 1) paring back some risk exposures as 2022 takes shape; and 2) turning to select nontraditional sectors for higher total return potential.
As we enter the stretch run of 2021, we are witnessing a seismic and rather abrupt shift in the global monetary policy framework. Notably, the big developed market (DM) central banks are gradually moving away from traditional forward guidance toward emphasizing greater policy flexibility and better risk management in response to economic and market developments. Based on recent central bank decisions, we think market participants will be less inclined to see monetary policymakers as reliable forecasters or drivers of economies and business cycles.
DM central banks, especially the US Federal Reserve (Fed), now find themselves in the unenviable position of grappling with stubborn supply-side inflation and fundamentally transformed job markets. Low unemployment rates, which are virtually back to pre-pandemic levels in major economies, may signal that the active labor pool has been structurally diminished by some combination of early retirements, reduced immigration, labor support schemes, and/or people leaving the workforce altogether during COVID-19. Global policymakers are still trying to determine how many jobs are just “missing” and likely to return eventually, versus how many are probably never coming back (Figure 1).
The challenges of the past 18 months or so have highlighted the potential for environmental, social, and governance (ESG) factors to become even more relevant to asset management and have underscored the ever-increasing importance of stewardship by fiduciaries and active investors alike. ESG has quickly become one of the defining investment criteria of this decade — a trend we have little doubt will endure in 2022 and beyond.
We have long believed that mounting sovereign debt burdens pose a risk to investors, even in developed markets. At the very least, investors are not being adequately compensated for investing in the most heavily indebted countries. Given the sharp rise in government debt levels in response to the global COVID-19 crisis, it’s an opportune time for sovereign bond investors to refresh their investment frameworks, the particular metrics to be applied, and their country-selection methodologies, including the ESG factors underlying investment decision making.