While the policy cycle appears to be turning and fixed income has started to perform, we could see near-term volatility. But amid a reshaped bond landscape, with higher yields and flatter curves, investors have ways to address market challenges. In our Q1 Bond Compass, we focus on three areas: investment grade credit, emerging market debt and short-maturity strategies.
Lucy Brown, SPDR Fixed Income Product Specialist and Jason Simpson, Senior Fixed Income ETF Strategist provide a brief overview of the major themes in this quarter’s Bond Compass.
Lucy Brown: Investors are dusting themselves off after enduring one of the harshest years seen in fixed income on record. Jason, what are the flows telling us?
Jason Simpson: Well, we saw a recovery in risk assets in Q4. Real money investors showed a distinct preference for high quality assets inflows into treasuries remain strong in their 90th percentile. Euro government bomb buying was led by Bunds and OAT’s and in credit there was a big preference for investment grade over high yield and lastly, flows into em. Debt failed to recover.
Lucy Brown: Of course, this year, inflation remains one of the key factors for the markets. What are we seeing from the price stats?
Jason Simpson: The price stats series derived from thousands of online prices confirms that a top is in place for inflation. US in particular, we expect to see inflation continuing to decline. However, it does flag up continued increases in food prices, and this coupled with withdrawal of energy subsidies could see European inflation stay higher for longer and therefore keep the ECB a little more hawkish.
Lucy Brown: With the new prevailing fixed income landscape, what do we see as the main opportunities for fixed income investors in Q1?
Jason Simpson: Yeah, theme wise, we like investment grade credit exposures. We opt for short duration in Europe, but with fed rates close to a peak, we take on a little more duration risk in the us. The second one is emerging market debt. There there are three key drivers, the attraction of the high yield on that debt, a continuing decline of the dollar, and a turn in the emerging market, central bank cycle. And thirdly, we see the front end of the US curve as a great place to allocate if you are waiting for some clarity on the growth and inflation outlook.
Lucy Brown: Thank you for listening. The full publication of our Q1 Bond Compass is available on our website.
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