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The Challenge of Fixed Income Investing in 2018

  • Posted by: ,  Chief Executive
  • 07 February 2018
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Unique Perspectives on Fixed Income for 2018

With economies strengthening and central banks tightening, bond market investors face a challenging 2018. In addition to examining the market outlook, the papers below place fixed income under the spotlight and examine it from a variety of angles…

What is necessary in order to manage inflation risk and credit risk concurrently? Is volatility even pertinent for credit analysis? Will long-term treasury allocations really offset equity risk? And the BoE answers the question on everyone's lips - what lessons do 13th century Venetian interest rate movements have for today's bond market?

Savvy Investor

Invesco Global Fixed Income Study 2018
(For compliance purposes, this paper is only accessible in certain geographies)
Invesco's Global Fixed Income Study identifies and presents 6 themes, including: new normalisation, low yields and other challenges for investors, ESG, alternative credit, and internal vs external asset management.

Global Cash Outlook 2018: Cash Investments in a Shifting Rate Environment (SSGA)
Although various central banks around the world may be at different points within the interest rate cycle, with the global economy growing faster in 2018, cash investors should be wary of ripples caused by tighter monetary policy.

Bringing Balance to Income Portfolios: Taking Control of Bond Market Risk (AB)
(For compliance purposes, this paper is only accessible in North America and South America)
As volatility increases, the trade-off between risk and return is an important one to consider for income-oriented investors. Interest rate and credit risk both pay off over time, but rarely concurrently; managing both risks is important.

The question for 2018: Will inflation surprise to the upside? (Eaton Vance)
(For compliance purposes, this paper is only accessible in the USA and Canada)
Eaton Vance discusses monetary policy in 2017, fixed income market-related events, and why there may be an upward bias to interest rates and inflation as the global economy charges on into 2018.

Credit Quarterly Outlook Q1 2018 (Robeco)
The Robeco Credit Team see more upside to global growth and fear that central banks risk being caught behind the curve. In this environment, investors should expect less technical support, decompression of yields and greater volatility.

Video: Bonds 2018 Outlook (Eaton Vance Institutional)
(For compliance purposes, this paper is only accessible in the USA and Canada)
Signs of inflation in Europe and Japan plus a tighter labor market in the USA could spell trouble for bond investors across the globe in 2018. Kathleen Gaffney of Eaton Vance's Diversified Fixed Income team explains further in this video.

Volatility: not a risk measure for credit markets? (Fidelity International)
(For compliance purposes, this paper is only accessible in the UK and Europe)
For investors in bonds, relying on volatility to assess risk could be a mistake. Volatility's normal distribution does not properly capture tail risk in bond returns, and the particular historical data set for analysis is also critical.

Treasuries for the Long Run (Callan, Jan 2018)
Will allocating to long-term US Treasuries adequately protect against future losses? Callan examines historical data and concludes that this may not be a smart move, given their mixed record when it comes to offsetting equity risk.

The Illusion of Active Fixed Income Diversification (AQR Capital Management)
AQR looks at active fixed income managers, finding that recent outperformance is largely due to overweighting high yield credit investments. This implies bad news for the diversification benefit of the fixed income asset class. 

Exit door scenarios: Guard against rising correlations (Fidelity Intl, Nov 2017)
(For compliance purposes, this paper is only accessible in the UK and Europe)
Fidelity International explains how investors guarding against rising correlations during a cyclical downturn, could use short futures, pair trading, alternative assets, or they could adapt the portfolio construction process itself.

Risk & Reward Q4 2017: The Rise of Digital Lending (Invesco)
(For compliance purposes, this paper is only accessible in certain geographies)
Digital lending and alternative finance platforms within the fintech world are examined in this issue of Invesco's Risk & Reward, including a discussion from Samir Desai of Funding Circle and Raghavendra Rau of Cambridge University.

Private Credit Strategies: An Introduction (Cambridge Associates, 2017)
Cambridge Associates introduces the world of private credit, redefining it while exploring capital preservation strategies, opportunistic strategies, return-maximising strategies, and niche strategies.

Sustainability Risks in Developed Markets Fixed Income (PineBridge, Nov 2017)
PineBridge introduces industry level key risk indicators for sustainability reporting so that investors can quantify ESG issues within portfolios and examine them in terms of alpha enhancers and risk diversifiers.

RFR: bond market reversals from the Venetians to the ‘VaR shock’ (BoE, 2017)
The Bank of England presents a study of interest rates that goes as far back as the data will allow - to the 13th century. They then show why current bond bull market could glean lessons the events of 1965-1970.

The "R-star" or "natural" rate - are investors too complacent? (June 2017)
Access our previous Savvy blog piece on the definition and analysis of 'normal' interest rates.

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