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A More Hawkish Fed: Bond and Debt Market Update

More Questions than Answers?

Although the U.S. Federal Reserve and the Bank of England both duly obliged with 25 basis points rate increases (the Fed’s first in four years) there appeared to be some consternation at the Fed’s ‘dot plot’ forecasts and the significantly more hawkish tone from Jay Powell, so much so that the 5-10 year yield curve inverted for the first time since 2007. Curve inversions tend to bring central bankers out in cold sweats, as they often portend recessions. Whether this was the market suggesting to the Fed that its intended policy approach was one that was unworkable, or something else, will unfold in the bond markets in the coming sessions.

Among the selection of papers here, Capital Group offers suggestions about investing during a rate hiking cycle, while several others look at the other significant issue facing portfolio managers: how to address climate and ESG issues within debt portfolios. Other papers from Janus Henderson and FTSE Russell look at the potential for structured and CMBS products, while Dimensional Fund Advisors looks at equity returns being a predictor of corporate bond returns, something they believe warrants further investigation.

currency notes

Examining Global Corporate Bond Returns (Dimensional Fund Advisors, 2022)

Dimensional Fund Advisors argue that forward rates contain reliable information about the cross-section of expected bond returns. However, short-term equity return has reliable information about cross-sectional differences in corporate bond returns, something they believe could be exploited.

Addressing Climate Change in Sovereign Bond Portfolios (BlackRock, 2022)

For compliance reasons, this paper is only accessible in the United States and Canada

Sovereign bonds play an important role for many investors when building balanced portfolios. And they can play a crucial role in helping the transition to a carbon-neutral world if investors actively seek to reduce the amount of carbon emissions from selected investments versus a benchmark.

Unlocking Impact Outside of ESG-labelled Debt (T. Rowe Price, Feb 2022)

For compliance reasons, this paper is only accessible in certain geographies

T. Rowe Price argues that ESG financing needs to be a lot more than looking at the label if one wants to make an impact while avoiding the 'greenium' which is invariably paid for an ESG-labelled bond.

An Introduction to Freddie K (FTSE Russell, Feb 2022)

For compliance reasons, this paper is only accessible in certain geographies

In this paper FTSE Russell introduces Freddie K, one of the major agency CMBS products, with $321 billion outstanding as of December 2021. The paper summarises the stringent underwriting and securitisation process and offers additional insights into this loan category, which has proved resilient during economic downturns.

Global Fixed Income Strategy Report (Invesco, Feb 2022)

For compliance reasons, this paper is only accessible in certain geographies

In their Global Fixed Income Report, Invesco discusses the recent abrupt turn to hawkishness by central banks, some of the pitfalls associated with carbon offsets, and how to approach earning income while also reducing volatility in investment grade bonds.

The Compelling Case for Global Senior CLOs (PGIM Fixed Income, Feb 2022)

PGIM Fixed Income argues that global senior CLOs offer attractive relative and absolute value backed by strong structural protection and a low default rate.

Global Structured Debt Insight (Janus Henderson Investors, Mar 2022)

For compliance reasons, this paper is only accessible in certain geographies

This piece from Janus Henderson Investors focuses on current trends in the securitised markets, offers suggestions to optimise portfolio returns in a rising rate environment, and illustrates why they believe secured loans could benefit portfolio returns during 2022.

Global Financial Risk Factors and Sovereign Risk (VoxEU, 2022)

The authors highlight the interconnectedness between balance sheets of sovereign nations and global financial institutions. Capital market banks play a significant role in underwriting sovereign bonds, and moves in global financial markets may negatively impact the sovereign debt via a synchronous repricing during ‘risk-off’ periods.

Investing in Fixed Income During a Hiking Cycle (Capital Group, Feb 2022)

For compliance reasons, this paper is only accessible in certain geographies

Capital Group makes the case that a rising rate cycle need not be bad for fixed income investors as they tend to overestimate the impact of rising rates, while bonds still offer diversification benefits in a balanced portfolio.

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