Macroeconomics

Yield curve shape and yield curve change are often good predictors of the state of the economy and its outlook.

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

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.

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.

TwentyFour Partner and Portfolio Manager, Douglas Charleston, explains how ABS markets have performed in Q4 2021 and provides his outlook for the new year.

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.

Jerome Powell’s recent testimony to the Senate Banking Committee, in which he said the Fed would discuss a faster taper of its asset purchases at December’s FOMC meeting, has led to intense speculation that we could see a move this week.