Skip to main content

Global Market Outlook

Bonds Are Poised for a Turn

The Fed’s hawkish rhetoric will likely shift over the next year, opening a window for increased opportunities in fixed income.

Head of Active Global Fixed Income

Fixed income investors will remember 2022 as one of the most trying years, with bond yields rising dramatically year to date translating to some of the worst total returns in decades. Across the board, global yield levels have risen sharply — in both developed and emerging economies. Rising interest rates, market volatility, and widening spreads across sectors have pressured fixed income total returns with an intensity that few experts predicted. Fixed income investors, long accustomed to the diversification, stability, liquidity, income, and total-return attributes of traditional fixed income, have had to reassess their fixed income strategies and embrace a more flexible, tactical, and long-term approach to weather these storms. Investors are eager for a signal that fixed income markets will turn.

Despite these challenges, we expect conditions to shift in fixed income markets over the next 12–18 months. Amid these challenges we do see bright spots and areas of opportunity for investors. One bright spot is that, although price returns have been painful, investors are notably now getting more income from their fixed income than they have in a long time. Current yield levels in most of the major fixed income sectors are either at 10-year highs or at the higher end of these ranges. Record levels of inflation, triggering central bankers’ raising of short-term interest rates, continue to be the main drivers of the bond market’s poor performance. As such, yield momentum remains bearish in the short-term.

Keeping Both Hands on the Wheel, with Eyes on the Long-Term

Long-term structural indicators continue to point to a low-growth environment anchored by slow labor force growth and weak productivity growth (see Figure 1). Demographics have been trending downward for several decades and are expected to continue to do so in the developed world. Labor force participation is a major factor driving the picture. An expansion in participation could help offset slowing population growth and aging demographics. However, the participation rate remains below pre-pandemic levels, and if we exclude the recent period since Covid, one would have to go back to 1977 to see a participation rate as low as it is today.

The first quarter of 2022 also saw the largest contraction in productivity — down 7.5% quarter-over-quarter— that we have seen in 75 years, anchoring longer-term trends in productivity. Debt also continues to pile up, further inhibiting a strong growth environment, and governments, businesses, and consumers face increasing interest costs as a percentage of income. While these trends will continue to anchor real economic activity and therefore real interest rates, cyclical developments in growth and inflation will dominate the short-term outlook.

Cyclically, growth has been slowing since the summer of 2021, and recession risks are rising. The yield curve2  is negative. Forward rate expectations are well above underlying economic fundamentals. And central banks, particularly the US Federal Reserve, have indicated they are getting closer to the end of the hiking cycle.

Year-over-year inflation likely peaked in June of this year and will continue to fall over the course of the next 12–18 months. Some relief from upward inflationary pressures should stem from incremental improvements occurring in supply-side pressures, as well as tightening financial conditions that are already dampening economic activity. In order for inflation to remain sustainably at current levels, we would need to see meaningfully higher moves in long-term inflation expectations, which have remained well anchored. The latest University of Michigan survey found that the median respondent projects inflation to rise 2.9% on average over the next 5–10 years. This represents an increase of only approximately 0.4% in long-term expectations over the past 12 months, during which time year-over-year Consumer Price Inflation (CPI) has doubled from 5.4% to 8.2%. In this context, we believe we are entering the window where investors should consider increasing their allocations to fixed income within portfolios (see Figure 2).

Figure 2: Entering the Window to Consider Increasing Fixed Income Allocations

10-Year Yield Change from 1 Year Before First Rate Hike

10 Year Yield Change from 1 Year Before First Rate Hike

Source: Bloomberg Finance, L.P., Federal Reserve, and State Street Global Advisors analysis, as of September 30, 2022.

Closing Thoughts

We are closely monitoring inflation and the risks of overtightening as the Fed continues its singular focus on fighting inflation. The Fed’s hawkish rhetoric will likely shift over the next year. As we see value building in rates, we prefer duration over spread products and investment grade over high yield. We remain cautious on credit and will continue to be so until the clouds of economic uncertainty begin to dissipate. The market’s volatility which has contributed to credit spreads widening is likely to present opportunities for discerning credit investors. When more clarity appears on the credit landscape, we think investors should consider global markets, including emerging market debt which has been repriced to levels that may sufficiently pique interest. More tactical investors with shorter time horizons may want to hold off on buying fixed income, given the current bearish rate and spread momentum.

While 2022’s macroeconomic and market turmoil has resulted in negative total returns in most fixed income sectors, the widespread sell-off and continued volatility have opened up some attractive opportunities for fixed income investors with longer-term horizons. We remain vigilant and conservative, focused on the long-term view and keeping steady hands at the wheel.

How to Play the Theme:

Marketing Communication.

For Professional Investor use only.

All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.

The returns on a portfolio of securities which exclude companies that do not meet the portfolio's specified ESG criteria may trail the returns on a portfolio of securities which include such companies. A portfolio's ESG criteria may result in the portfolio investing in industry sectors or securities which underperform the market as a whole.

Responsible-Factor (R-Factor™) scoring is designed by State Street to reflect certain ESG characteristics and does not represent investment performance. Results generated out of the scoring model is based on sustainability and corporate governance dimensions of a scored entity.

Bonds generally present less short-term risk and volatility than stocks but contain interest rate risk (as interest rates raise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.

The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor's or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This document has been issued by State Street Global Advisors Europe Limited (“SSGAEL”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 49934. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web:

SPDR ETFs is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.

SSGA SPDR ETFs Europe I & SPDR ETFs Europe II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organized as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorized as a UCITS by the Central Bank of Ireland.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

Please refer to the Fund’s latest Key Investor Information Document and Prospectus before making any final investment decision. The latest English version of the prospectus and the KIID can be found at

A summary of investor rights can be found here:

Note that the Management Company may decide to terminate the arrangements made for marketing and proceed with de-notification in compliance with Article 93a of Directive 2009/65/EC

The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstr. 19, 8027 Zurich, as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at

© 2022 State Street Corporation. All rights reserved.

Adtrax: 5330052.1.2.EMEA.INST

Exp. Date 30/11/2023

More from the Global Market Outlook