Monetary Policy

Last week investors were faced with a double whammy of monetary tightening from the Bank of England (BoE), which on Thursday hiked interest rates by 25bp and announced the gradual unwind of its £20bn corporate bond portfolio.

For fixed income investors, the start to 2022 has been trickier than any we have experienced for many years, but we think this difficulty is to be expected and aligns with our macro view.

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.

Yesterday was a noisy day for the Bank of England (BoE) and European Central Bank (ECB), usually an undesirable situation for market participants.

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.

If 2021 was a bad year for global bond returns, it follows there were few natural shelters to be found within fixed income from the brunt of inflation and rates-driven volatility; the Barclays Global Aggregate Index (a widely used broad measure of bond performance) returned -4.7% in USD terms, while European investment grade credit returned -1.1% despite credit spreads tightening over the course of the year.

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.

With inflation and rate hikes dominating market discourse, we expect floating rate assets such as ABS and CLOs to benefit from increasing demand in 2022.

It has been a very interesting start to the year in the rates sector of the market.

Given the swiftness of the Fed’s pivot we think risks are tilted towards the central bank doing more and not less. We wouldn’t even rule out a 50bp rate hike at some point.

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.

How do investors deal with inflation? Do central banks know what they’re doing? And does anyone know where Treasuries are heading? CEO Mark Holman tackles the bond market’s biggest questions as he looks ahead to 2022.