High Yield Bonds

Default rate estimations depend on how you define defaults and what index you use, but there is no doubt we are at record lows in European high yield at the moment.

European bank equity has been among the hardest hit sectors since Russia’s invasion of Ukraine, as fears of losses and a flight to quality have prompted investors to change positioning.

Escalating geopolitical tensions have contributed to a volatile past week for investors, but uncertainty regarding central bank action continues to dominate the bond markets, with one investment bank now predicting nine straight hikes from the Fed beginning at its March meeting.  

So far this year, the spread between two-year and 10-year US Treasury yields has declined from 77bp to 51bp.

As 2021 wore on we became increasingly concerned that the disconnect between asset prices, economic fundamentals and monetary policy was becoming more acute.

With inflation soaring and the economic recovery looking more fragile, we look at three famous central bank policy errors to demonstrate why they can be so dangerous for investors, and consider how a fixed income portfolio can be strengthened against the risk.

After a challenging January, which saw markets beginning to come to terms with a very hawkish Fed pivot and rising Russia-Ukraine tensions, it is worth taking stock of the moves we have seen in fixed income over the last few weeks.

Powell’s hard line may have surprised investors, particularly in light of recent market volatility and increasing geopolitical risk in Eastern Europe, but the Fed’s fear of prolonged higher inflation looks to be trumping those concerns.

Inflation was the dominant theme across financial markets in 2021, and we think it is likely to be a big driver of returns again in 2022.

Emerging markets assets have endured a lot of punishment during 2021.

Shortly after publishing his annual Rodney Blog, TwentyFour CEO Mark Holman sat down with Tom Porter to discuss the biggest calls fixed income investors will have to make in 2022, and explain why he believes the current disconnect between monetary policy, the economy and the markets cannot last for long.

Fundamentally the outlook for 2022 appears less supportive than it was 12 months ago.